UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ý |
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
|
| SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended: September 30, 2005
OR
o |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
|
| SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 0-20330
GARDENBURGER, INC.
(Exact name of registrant as specified in its charter)
OREGON |
| 93-0886359 |
(State or other jurisdiction |
| (I.R.S. Employer |
15615 Alton Parkway, Suite 350, Irvine, California 92618
(Address of principal executive offices)
Registrant’s telephone number, including area code: (949) 255-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes o No ý
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: o
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was $545,603 computed by reference to the last sales price as reported by the NASD’s OTC Bulletin Board ($0.07) as of the last business day of the Registrant’s most recently completed second fiscal quarter, March 31, 2005.
The number of shares outstanding of the Registrant’s Common Stock as of December 14, 2005 was 9,002,101 shares.
Documents Incorporated by Reference
None.
GARDENBURGER, INC.
2005 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
1
Where You Can Find More Information
We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 as amended (“Exchange Act”). You can inspect and copy our reports, proxy statements, and other information filed with the SEC at the offices of the SEC’s Public Reference Room in Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The SEC maintains an Internet site at http://www.sec.gov/ where you can obtain most of our SEC filings. We also make available, free of charge on our website at www.gardenburger.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are filed electronically with the SEC. The information found on our website is not part of this Form 10-K. You can also obtain copies of these reports by contacting Investor Relations at (949) 255-2000.
General
Gardenburger, Inc. was organized in 1985 as an Oregon corporation under the name Wholesome & Hearty Foods, Inc. and completed its initial public offering in 1992. In October 1997, we changed our name to Gardenburger, Inc; and, as our product line expanded to include meat alternative offerings beyond veggie burgers, began doing business in 2002 as Gardenburger Authentic Foods Company. Our common stock trades on the over-the-counter market and is quoted on the NASD’s OTC Bulletin Board.
Going Concern and Chapter 11 Filing
Our financial statements have been presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, we were out of compliance with certain debt covenants as of June 30, 2005 and September 30, 2005. Because of such non-compliance, we classified all of our outstanding debt as current beginning with our June 30, 2005 balance sheet. In addition, as a result of CapitalSource Finance, LLC (“CapitalSource”) and Annex Holdings I LP (“Annex”) having the ability to call our debt at any point in time, all related exit fees were accrued and all remaining deferred financing fees were written off during the third quarter of fiscal 2005.
Both CapitalSource and Annex currently have the right to declare all of the outstanding amounts due to them under their respective agreements immediately due and payable; however, the outstanding indebtedness due and payable to CapitalSource was refinanced as described below. We do not currently have the cash or alternative financing source needed in order to pay such amounts. In addition, we have a working capital deficiency, incurred substantial net losses applicable to common shareholders for fiscal years 2005, 2004 and 2003 and had negative operating cash flow in 2004. We had a total shareholders’ deficit at September 30, 2005 of $82.0 million. We are highly leveraged and have significant annual interest and dividend accruals related to our convertible note payable and convertible redeemable preferred stock, which contribute to our net losses and shareholders’ deficit.
Operating under this heavy debt burden and facing a continuing decline in our product category and increased competition during 2005, we determined that in order to maximize value for our creditors and, if feasible, preferred shareholders, we moved forward with an effort to sell our business as a going concern. We made this decision recognizing (i) the likelihood that we did not have sufficient resources or credit availability to effectively defend our market share in the grocery channel under existing circumstances, (ii) the significant risk that our enterprise value would further erode if we continued to operate our business on a highly leveraged basis, and (iii) that there was substantial doubt, if we continued to operate under our existing debt burden, regarding our ability to continue as a going concern. Based on our going concern sale efforts in fiscal 2005, we have determined that the
2
value of Gardenburger is inadequate to allow for any recovery or retention of rights by our equity holders.
Following several unsuccessful efforts to sell Gardenburger as a going concern over the past six years, including our fiscal 2005 efforts, as well as unsuccessful efforts to restructure and recapitalize Gardenburger, partially due to a lack of consensus between Annex and our preferred shareholders regarding distribution of the proceeds of a sale and the allocation of rights under a restructuring, on October 14, 2005, we filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Central District of California, Santa Ana Division (the “Bankruptcy Court”) (Case No. SA 05-19539-JB) (the “Chapter 11 Case”). In connection with this Chapter 11 Case, on December 9, 2005, we filed a Plan of Reorganization (the “Plan”) and a related Disclosure Statement with the Bankruptcy Court.
Significant terms of the Plan are as follows:
• Amounts due to holders of general unsecured claims will be fully paid over an 18 month period;
• All outstanding preferred stock and common stock will be terminated with no compensation to the holders thereof, thereby converting Gardenburger to a privately held company from a publicly held company;
• Elimination of all principal, accrued interest and accrued exit fees due pursuant to our Note Purchase Agreement, as amended, and Second Amended and Restated Convertible Senior Subordinated Note, as amended (the “Convertible Note”) held by Annex, which totaled $28.0 million as of September 30, 2005, and issuance of new equity interests in Gardenburger to Annex in full satisfaction of this claim;
• Payment of all principal and accrued interest due pursuant to our Revolving Credit and Term Loan Agreement, as amended (the “Loan Agreement”) with CapitalSource, which totaled approximately $8.2 million as of September 30, 2005; and
• Ongoing operation of our business on a viable basis following confirmation of the Plan.
We will continue to operate our business in the ordinary course as debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code.
Bankruptcy law does not permit solicitation of acceptances of the Plan until the Bankruptcy Court approves the applicable Disclosure Statement relating to the Plan as providing adequate information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor’s books and records, that would enable a hypothetical reasonable investor typical of the holder of claims or interests of the relevant class to make an informed judgment about the Plan. Accordingly, this is not intended to be, nor should it be construed as, a solicitation for a vote on the Plan. We will emerge from the Chapter 11 Case if and when the Plan is confirmed by the Bankruptcy Court.
The filing of the Chapter 11 Case constituted events of default under our Loan Agreement with CapitalSource and our Convertible Note held by Annex. As a result of the events of default, all debt outstanding under such loan documents became automatically and immediately due and payable. As of September 30, 2005, the amount of outstanding debt and accrued interest under the Loan Agreement was approximately $8.2 million, which was paid on November 22, 2005 utilizing proceeds from our debtor-in-possession credit facilities discussed below. The amount of outstanding debt under the Convertible Note was approximately $28.0 million as of September 30, 2005. We believe that any effort of Annex to enforce their rights under the Convertible Note will be stayed as a result of the filing of the Chapter 11 Case. In any event, we understand that Annex does not currently contemplate any such action and that Annex supports the Plan.
3
Debtor-in-Possession Credit Facilities
In connection with the Chapter 11 Case, on October 17, 2005, and as approved by the Bankruptcy Court on October 18, 2005, we entered into an interim financing arrangement with CapitalSource. In addition, senior and second lien credit facilities with Wells Fargo Bank, National Association, acting through its Wells Fargo Business Credit operating division (“WFBC”), and GB Retail Funding, LLC (“GB”), respectively, were approved by the Bankruptcy Court on November 16, 2005.
We require credit facilities for use during the Chapter 11 Case (“DIP Financing”) and to meet our working capital needs and fund our obligations under the Plan upon and following the effective date of the Plan (“Exit Financing”).
The WFBC credit facilities provide for a secured revolving line of credit (the “WFBC Revolving Credit Facility”) in an amount not to exceed $7.5 million and a secured equipment term loan (the “WFBC Term Credit Facility”) of $2.2 million. As of December 14, 2005, the amounts outstanding under the WFBC Revolving Credit Facility and the WFBC Term Credit Facility were $0.4 million and $2.2 million, respectively. Upon the effective date of the Plan that is satisfactory to WFBC, the WFBC credit facilities will convert to Exit Financing facilities by automatically extending the maturity date of the WFBC credit facilities to the date thirty-six months after the date of closing of the WFBC credit facilities (November 22, 2008). The WFBC credit facilities were used to refinance our CapitalSource debt and will provide for ongoing working capital needs and for payment of obligations under, and in accordance with, the Plan. All loans, advances and obligations under the WFBC credit facilities are secured by first priority security interests on all of our assets and reorganized Gardenburger, except general intangible assets (i.e., intellectual property, trademarks, brand names and domain names) and proceeds thereof.
The amount available under the WFBC Revolving Credit Facility is the lesser of (i) $7.5 million or (ii) up to the sum of: (i) 85% of eligible accounts receivable and (ii) the lesser of (a) $4.5 million or (b) the lesser of (x) 44.9% of eligible raw materials inventory plus 63.4% of eligible finished goods inventory or (y) 85% of the appraised net orderly liquidation value of eligible raw material inventory and eligible finished goods inventory, less (iii) reserves maintained by WFBC. The interest rate on the WFBC Revolving Credit Facility is the Prime Rate plus 0.50% per annum floating, payable monthly in arrears calculated on the basis of actual days elapsed in each year of 360 days. We or reorganized Gardenburger may also elect to fix the rate of interest on portions of revolving advances at an interest rate equal to 3.25% over Wells Fargo LIBOR. The default rate of interest will be 3.00% higher than the rate otherwise payable. A fee of 0.50% per annum on the unused portion of the WFBC Revolving Credit Facility will be payable monthly in arrears. As of December 14, 2005, we had $0.4 million outstanding on the WFBC Revolving Credit Facility at an interest rate of 7.75% and $3.1 million available for future use. We utilized $0.7 million of the proceeds from this facility to pay off the entire balance owed to CapitalSource pursuant to their Loan Agreement and, accordingly, as of the date of the filing of this Form 10-K, we do not owe any amounts to CapitalSource.
The initial amount available under the WFBC Term Credit Facility was $2.2 million. The interest rate on the WFBC Term Facility is the Prime Rate plus 1.00% per annum floating, payable monthly in arrears, calculated on the basis of actual days lapsed in a year of 360 days. We or reorganized Gardenburger may also elect to fix the rate of interest on portions of term advances at an interest rate equal to 3.75% over Wells Fargo LIBOR. The default rate of interest will be 3.00% higher than the rate otherwise payable. As of December 14, 2005, we had $2.2 million outstanding on the WFBC Term Credit Facility at an interest rate of 8.25%.
Pursuant to the Credit and Security Agreement, dated November 22, 2005, governing the WFBC credit facilities (the “WFBC Credit Agreement”), we are required to comply with certain financial covenants, which are described below:
4
(a) We are required to maintain a minimum Availability (as defined in the WFBC Credit Agreement) as follows:
Dates |
| Minimum Availability |
| |
11/22/05 through 12/02/05 |
| $ | 2,000,000 |
|
12/03/05 through 12/30/05 |
| $ | 1,750,000 |
|
12/31/05 and at all times thereafter |
| $ | 1,500,000 |
|
(b) We are required to achieve Net Cash Flow (as defined in the WFBC Credit Agreement) in an amount not less than the amount set forth below for the periods set forth below:
Test Period |
| Minimum Net Cash Flow |
| |
10/01/05 through 12/02/05 |
| $ | (900,000 | ) |
10/29/05 through 12/30/05 |
| $ | (600,000 | ) |
12/03/05 through 01/27/05 |
| $ | (1,800,000 | ) |
12/31/05 through 02/24/06 |
| $ | 200,000 |
|
(c) We are required to achieve, for each period described below, gross sales of not less than the amount set forth for each such period:
Period |
| Minimum Gross Sales |
| |
10/01/05 through 10/31/05 |
| $ | 3,600,000 |
|
11/01/05 through 11/30/05 |
| $ | 3,000,000 |
|
12/01/05 through 12/31/05 |
| $ | 3,600,000 |
|
01/01/06 through 01/31/06 |
| $ | 4,300,000 |
|
02/01/06 through 02/28/06 |
| $ | 3,900,000 |
|
03/01/06 through 03/31/06 |
| $ | 5,100,000 |
|
04/01/06 through 04/30/06 |
| $ | 4,500,000 |
|
05/01/06 through 05/31/06 |
| $ | 5,200,000 |
|
06/01/06 through 06/30/06 |
| $ | 5,200,000 |
|
07/01/06 through 07/31/06 |
| $ | 4,700,000 |
|
(d) In the event we fail to achieve the minimum gross sales as set forth in item (c) above for any period set forth above, we are required to achieve, for the period set forth below ending on the same end date as the period for which we failed such minimum gross sales covenant, cumulative Net Sales (as defined in the WFBC Credit Agreement) of not less than the amount set forth below for the period ending on the date set forth below:
Period |
| Minimum Net Sales |
| |
10/01/05 through 10/31/05 |
| $ | 3,100,000 |
|
10/01/05 through 11/30/05 |
| $ | 5,700,000 |
|
10/01/05 through 12/31/05 |
| $ | 8,600,000 |
|
10/01/05 through 01/31/06 |
| $ | 12,100,000 |
|
10/01/05 through 02/28/06 |
| $ | 15,500,000 |
|
10/01/05 through 03/31/06 |
| $ | 19,700,000 |
|
10/01/05 through 04/30/06 |
| $ | 23,700,000 |
|
10/01/05 through 05/31/06 |
| $ | 27,800,000 |
|
10/01/05 through 06/30/06 |
| $ | 32,000,000 |
|
10/01/05 through 07/31/06 |
| $ | 36,000,000 |
|
Pursuant to the WFBC Credit Agreement, on or before February 24, 2006, Wells Fargo shall set new covenant levels for item (b) above. The new covenant levels will be based upon our projections and cash budget for such periods received by Wells Fargo pursuant to the Credit and Security Agreement and will be no less stringent than the present levels, except that with respect to item (b) above, the new covenant levels will be based on a $500,000 negative variance based upon the projections and updated cash flow budget for such periods. A copy of the Wells Credit Agreement is attached to this Annual Report on Form 10-K as Exhibit 10.74.
5
The GB Loan Facility consists of a $5.0 million secured single-advance term loan. This facility is secured by a second priority lien in all collateral securing the WFBC credit facilities, except that it is secured by a first priority perfected security interest in all of our general intangible assets (i.e., intellectual property, trademarks, brand names and domain names) and proceeds thereof. The interest rate on the GB Loan Facility is the Prime Rate plus 6.75% per annum floating, payable monthly in arrears. As of December 14, 2005, we had $4.9 million outstanding on the GB Loan Facility at an interest rate of 14.0%. Upon the effective date of the Plan that is satisfactory to GB, the GB Loan Facility will convert to an Exit Financing facility by automatically extending the maturity date of the GB Loan Facility to the date thirty-six months after the date of closing of the GB Loan Facility (November 22, 2008).
Pursuant to the Credit and Security Agreement, dated November 22, 2005, governing the GB Loan Facility (the “GB Credit Agreement”), we are required to comply with certain financial covenants that are identical to the financial covenants described above in connection with the WFBC credit facilities. A copy of the GB Credit Agreement is attached to this Annual Report on Form 10-K as Exhibit 10.75.
As of December 2, 2005, we were in compliance with all of the financial covenants described above.
Overview
We believe we are one of the leading producers and marketers of meat alternative products and branded veggie burgers. The Gardenburger® product line is a national brand in the retail grocery, food service, club store and natural foods channels of distribution and features core burger offerings such as the Original Gardenburger® veggie burger, meatless soy burgers such as Gardenburger Flame Grilled, and innovative meatless specialty items such as new Gardenburger Meals.
The popularity of protein-based low carbohydrate diets like Atkins and South Beach have positively impacted the sales of beef, pork and chicken and have negatively impacted the meatless category. As these diet trends have slowed, the category velocity declines have stabilized. In addition, our results were adversely affected in fiscal 2005 by increased competition for market share as a source of growth due to flat consumer consumption. In fiscal 2006, we believe that Gardenburger has the opportunity to strengthen its market share in a relatively flat category through a combination of product mix optimization and repositioning to better leverage the brand’s heritage among heavy category consumers.
Approximately 72% of our gross sales were attributable to the Gardenburger® veggie burger and soy burger products, with the remaining 28% attributable to our newer meat alternative products in fiscal 2005. Consumers, in general, have been moving to the wider range of meat alternative products becoming available in the marketplace. In response to this development in consumer tastes, in fiscal 2003, we added five new products, including BBQ Chik’n and Meatless Meatloaf. In the third quarter of fiscal 2004, we introduced a new line of six microwaveable meatless entrees to capitalize on the consumers’ need for convenience. We further expanded our convenience focus with the early fiscal 2005 launch of Gardenburger Wraps.
We intend to continue as an innovative force in the meat alternative category with the objective of being a leading provider of meatless meal alternatives in the four primary distribution channels in which we distribute our products: retail grocery stores; food service, including restaurants, universities and other commercial outlets; club stores; and natural foods outlets. We currently distribute our products through more than 24,000 retail outlets, 30,000 food service outlets, 113 club store locations and 3,500 natural foods stores.
Within the retail grocery channel, our largest channel of distribution, we have approximately 190,000 retail grocery placements of our products, representing an all commodity volume (“ACV”)(1) penetration of
(1) ACV calculates the percentage of U.S. stores that carry at least one Gardenburger product.
6
approximately 69% as of September 30, 2005, with an average of 5.0 product variations available in each retail outlet. Each product is commonly referred to as a stock keeping unit (“SKU”).
Business Strategy
In recent years, we have seen increased competition in the meat alternative category, including the veggie burger segment, and have seen our market share of meat alternative burgers decline due to heavy spending by competitors and changes in consumers’ eating habits. Our business strategy consists of the following key elements:
Focus on Achieving Profitability. We are focused on achieving near-term profitability. In furtherance of this goal, fixed overhead is closely monitored. Trade and marketing spending is focused on product mix optimization, in-store activity and direct marketing to heavy category users, as we believe this approach has the quickest and most direct impact on sales.
Leveraging Nutritional Benefits of Products. Gardenburger’s products are inherently good sources of fiber, protein and other vitamins. The brand continues to leverage these and other functional foods benefits in product introductions.
Increase Key Channel Penetration. We believe that we are one of the leading producers and marketers of meatless products in the retail grocery, food service, club store and natural foods distribution channels. Our goal is to manage a strong brand position in these channels with profitability in all channels. We will focus on improving our product mix to increase share in grocery, ensuring the highest velocity Gardenburger items are on shelf at key retailers. We are pursuing profitable growth in the food service channel where we have a strong market position across key business segments. We were selected as a vendor of choice in the Sysco Corporation launch of its Moonrose Vegetarian line, a private label brand of premium products targeted at the emergent food service natural foods segment. In addition, we believe that other distribution channels, such as sandwich chains, K-12 schools and colleges and universities, present growth opportunities, and we continue to actively pursue these opportunities through sales calls to potential customers and research into product types that best suit the particular markets.
Products
Gardenburger is committed to offering great tasting, better-for-you, convenient meatless food choices to consumers. All of our products are frozen and include: grain-based and soy-based veggie burgers, which are offered in eleven varieties, and include specialized burger products in certain channels, including Gardenburger Sub™ for food service and GardenVegan® for natural food stores. We also offer a variety of meat analog products including Chik’n Grill, Meatless Riblets, Meatless Meatloaf, and Herb Crusted Cutlet, all of which imitate the taste and texture of beef, chicken or pork products. In addition, in fiscal 2004 and 2005 we introduced Meals and Wraps in the retail and natural food channels to capitalize on the consumers’ need for convenience.
The recipes for our products are proprietary, although they contain commonly known ingredients. Veggie-grain based burgers contain fresh mushrooms, brown rice or other whole grains, onions, rolled oats, cheeses, bulgur wheat, natural seasonings and spices. Soy-based products are seasoned to taste like chicken, pork or beef. All of our meat alternative products are considerably lower in fat and calories than respective meat products of comparable weight, are good sources of protein and are made with all natural grains and vegetables.
7
Our products are as follows:
Retail Grocery Burger Products
Product |
| Characterizing Ingredients |
| Fat |
| Calories |
|
The Original Gardenburger® sold in boxes of 4/2.5 oz. servings |
| Mushrooms, brown rice, soy, onions, rolled oats and low-fat cheese |
| 2g |
| 90 |
|
|
|
|
|
|
|
|
|
Gardenburger Black Bean™ sold in boxes of 4/2.5 oz. servings |
| Black beans, soy, brown rice, Anaheim chilies, onions, cumin, cilantro |
| 2g |
| 80 |
|
|
|
|
|
|
|
|
|
Gardenburger Veggie Medley® sold in boxes of 4/2.5 oz. servings |
| Soy, mushrooms, rolled oats, broccoli, carrots, red and yellow bell peppers |
| 2g |
| 90 |
|
|
|
|
|
|
|
|
|
Gardenburger Savory Portabella™ sold in boxes of 4/2.5 oz. servings |
| Portabella mushrooms, wild rice, soy, blue cheese, kashi blend |
| 2.5g |
| 100 |
|
|
|
|
|
|
|
|
|
Gardenburger Sun-Dried Tomato Basil™ sold in boxes of 4/2.5 oz. servings |
| Sun-dried tomatoes, soy, mushrooms, rolled oats, mozzarella cheese, basil |
| 3g |
| 100 |
|
|
|
|
|
|
|
|
|
Gardenburger GardenVegan® sold in boxes of 4/2.5 oz. servings |
| Bulgur wheat, brown rice, mushrooms, onions |
| 1g |
| 100 |
|
|
|
|
|
|
|
|
|
Gardenburger Homestyle Classic™ sold in boxes of 4/2.5 oz. servings |
| Soy, onion, garlic |
| 5g |
| 110 |
|
|
|
|
|
|
|
|
|
Gardenburger Flame Grilled® sold in boxes of 4/2.5 oz. servings |
| Soy, natural grill flavor |
| 4g |
| 120 |
|
8
Retail Grocery Meatless Specialty Products
Product |
| Description |
| Characterizing Ingredients |
| Fat |
| Calories |
|
Gardenburger Flame Grilled Chik’n™ sold in boxes of 4/2.5 oz. servings |
| Flame grilled meatless chicken |
| Soy, wheat gluten, sautéed vegetables and herbs |
| 2.5g |
| 100 |
|
|
|
|
|
|
|
|
|
|
|
Gardenburger BBQ Chik’n™ sold in 10 oz. packages |
| Meatless chicken with sauce |
| Soy, wheat gluten, barbecue sauce |
| 8g |
| 250 |
|
|
|
|
|
|
|
|
|
|
|
Gardenburger Buffalo Chik’n Wings™ sold in 10 oz. packages |
| Meatless chicken wings in hot sauce |
| Soy, wheat gluten, pepper sauce |
| 12g |
| 180 |
|
|
|
|
|
|
|
|
|
|
|
Gardenburger Country Fried Chik’n with Creamy Pepper Gravy™ |
| Meatless breaded chicken cutlet with gravy |
| Breading, soy, wheat gluten, cream gravy |
| 9g |
| 190 |
|
|
|
|
|
|
|
|
|
|
|
Gardenburger Meatless Riblets™ sold in boxes of 2/5 oz. servings |
| Meatless pork rib with sauce |
| Soy, wheat gluten, barbecue sauce |
| 5g |
| 160 |
|
|
|
|
|
|
|
|
|
|
|
Gardenburger Sweet & Sour Pork™ sold in 10 oz. packages |
| Meatless pork pieces in sweet & sour sauce |
| Soy, wheat gluten, sweet & sour sauce, green peppers, onion, pineapple |
| 2g |
| 170 |
|
|
|
|
|
|
|
|
|
|
|
Gardenburger Herb Crusted Chicken Patty™ sold in boxes of 4/2.5 oz. servings |
| Meatless breaded chicken patty |
| Breading, soy, wheat gluten |
| 9g |
| 170 |
|
|
|
|
|
|
|
|
|
|
|
Gardenburger Breakfast Sausage™ sold in boxes of 6/1.5 oz. patties |
| Meatless breakfast sausage |
| Soy |
| 3.5g |
| 50 |
|
|
|
|
|
|
|
|
|
|
|
Gardenburger Meatless Meatballs™ sold in 10 oz. packages |
| Meatless herbed meatballs |
| Soy, bread crumbs, parmesan cheese |
| 4.5g |
| 110 |
|
|
|
|
|
|
|
|
|
|
|
Gardenburger Meatless Meatloaf™ sold in 10 oz. packages |
| Meatless meatloaf with brown gravy |
| Soy, green pepper, onion, brown gravy |
| 3.5g |
| 130 |
|
9
Retail Grocery Meatless Meals
Product |
| Characterizing Ingredients |
| Fat |
| Calories |
|
Meatless Citrus Glazed Chicken With Green Beans and Rice |
| Soy, wheat gluten, brown and wild rice, green beans, citrus glaze |
| 2g |
| 220 |
|
|
|
|
|
|
|
|
|
Meatless Herb Grilled Chicken With Vegetables |
| Soy, wheat gluten, roasted zucchini, squash, green, red and yellow peppers, butter sauce |
| 5g |
| 220 |
|
|
|
|
|
|
|
|
|
Meatless Meatballs With Penne Marinara |
| Soy, breadcrumbs, parmesan cheese, penne pasta, tomato sauce |
| 4.5g |
| 300 |
|
|
|
|
|
|
|
|
|
Meatless Meatloaf With Broccoli and Red Peppers |
| Soy, green pepper, onion, brown gravy, broccoli florets, red peppers |
| 4.5g |
| 180 |
|
|
|
|
|
|
|
|
|
Meatless Southwestern Chicken With Vegetables |
| Soy, wheat gluten, black beans, corn, grilled peppers, enchilada sauce |
| 1.5g |
| 210 |
|
|
|
|
|
|
|
|
|
Meatless Sweet and Sour Pork With Rice |
| Soy, wheat gluten, sweet and sour sauce, green peppers, onion, pineapple, brown rice |
| 4g |
| 310 |
|
|
|
|
|
|
|
|
|
Black Bean Chipotle Wraps |
| Black bean patty, tortilla, chipotle sauce, mozzarella cheese |
| 8g |
| 240 |
|
|
|
|
|
|
|
|
|
Sun-Dried Tomato Basil Wraps |
| Sun-dried tomato basil patty, tortilla, tomato sauce, mozzarella cheese |
| 8g |
| 240 |
|
Club Channel Products
Product |
| Description |
| Characterizing Ingredients |
| Fat |
| Calories |
|
Original Gardenburger sold in packages of 17/3.5 oz. servings |
| Veggie-grain style burger |
| Mushrooms, brown rice, soy, onions, rolled oats and low-fat cheese |
| 4g |
| 130 |
|
|
|
|
|
|
|
|
|
|
|
Gardenburger Meatless Riblets sold in packages of 8/5.0 oz. servings |
| Analog pork rib with sauce |
| Soy, wheat gluten, barbecue sauce |
| 5g |
| 210 |
|
10
Food Service Products
Product |
| Description |
| Characterizing Ingredients |
|
48/3.4 oz. Original Gardenburger |
| Veggie-grain style burger |
| Mushrooms, brown rice, onions, rolled oats and low-fat cheese, soy |
|
|
|
|
|
|
|
60/2.5 oz. Original Gardenburger |
| Veggie-grain style burger |
| Mushrooms, brown rice, onions, rolled oats and low-fat cheese, soy |
|
|
|
|
|
|
|
36/5.0 oz. Original Gardenburger |
| Veggie-grain style burger |
| Mushrooms, brown rice, onions, rolled oats and low-fat cheese, soy |
|
|
|
|
|
|
|
48/2.75 oz. Gardenburger Sub™ |
| Veggie-grain style burger |
| Mushrooms, brown rice, onions, rolled oats, red bell pepper and cheese |
|
|
|
|
|
|
|
48/3.4 oz. Gardenburger Veggie Vegan® |
| Veggie-grain style burger |
| Soy, mushrooms, rolled oats, broccoli, carrots, red and yellow bell peppers |
|
|
|
|
|
|
|
48/3.4 oz. Gardenburger Santa Fe® |
| Gourmet burger |
| Black beans, Anaheim chilies, red and yellow bell peppers, corn, mushrooms, onion |
|
|
|
|
|
|
|
48/2.75 oz. GardenFresh |
| Veggie-grain style burger |
| Soy, mushrooms, onions, water chestnuts, carrots, and bell peppers |
|
|
|
|
|
|
|
48/3.4 oz. GardenFresh |
| Veggie-grain style burger |
| Soy, mushrooms, onions, water chestnuts, carrots, and bell peppers |
|
|
|
|
|
|
|
48/3.4 oz. Flame Grilled Soy™ |
| Flame grilled meatless burger |
| Soy, natural grill flavor |
|
|
|
|
|
|
|
48/3.4 oz. Gardenburger Fire Roasted Vegetable® |
| Gourmet burger |
| Roasted garlic, sun-dried tomatoes, brown rice, mushrooms, roasted peppers, corn, roasted bell peppers |
|
|
|
|
|
|
|
106/1.5 oz. GardenSausage® |
| Meatless sausage patty |
| Soy, vegetarian sausage flavor |
|
|
|
|
|
|
|
53/3.0 oz. Chik’n Grill™ |
| Flame grilled meatless chicken |
| Soy, sautéed vegetables and herbs |
|
|
|
|
|
|
|
1/10# (220 Nuggets) Chik’n Nuggets™ |
| Breaded meatless chicken nuggets |
| Breading, soy, wheat gluten |
|
|
|
|
|
|
|
48/3.4 oz. Diner Deluxe Burger™ |
| Fried meatless burger |
| Soy protein |
|
|
|
|
|
|
|
48/2.75 oz. Gardenburger Black Bean |
| Gourmet burger |
| Soy, black beans, brown rice, Anaheim chilies, onion, corn, cilantro |
|
|
|
|
|
|
|
48/3.4 oz. Gardenburger Black Bean |
| Gourmet burger |
| Soy, black beans, brown rice, Anaheim chilies, onion, corn, cilantro |
|
|
|
|
|
|
|
48/2.75 oz. Flame Grilled Sub Patty™ |
| Flame grilled meatless burger |
| Soy, natural grill flavor |
|
|
|
|
|
|
|
53/3.0 oz. Naked Riblets |
| Meatless riblet |
| Soy, vegetarian sausage flavor, and spices |
|
|
|
|
|
|
|
48/3.0 oz. Herb Crusted Chicken Patty |
| Breaded Meatless Chicken Patty |
| Soy, breadcrumbs, herbs and spices, and natural hickory smoke flavor |
|
11
Distribution
We primarily distribute our products into four channels: retail grocery, food service, club stores and natural foods stores.
Retail Grocery. Gardenburger products can now be found in more than 24,000 grocery stores with over 190,000 placements. Our ACV penetration in the U.S. retail grocery channel was approximately 69% as of September 30, 2005, with an average of 5.0 SKUs. Our products are currently carried in the majority of the major U.S. retail grocery chains.
Food Service. We distribute our products to more than 30,000 food service outlets throughout the U.S. and Canada, including restaurant chains such as Applebee’s, Fuddruckers, Red Robin, Subway, Blimpie and T.G.I. Friday’s. In many of these restaurants, the Gardenburger brand name appears on the menu. Additional points of food service distribution include academic institutions, hotels, amusement parks and sports stadiums. In the United States, there are approximately 800,000 outlets in the food service channel. We rely primarily on distributors such as Sysco for distribution to this channel.
Club Stores. Our products are distributed to club stores with over 113 locations, primarily Costco. Currently, these stores carry the Original Gardenburger. We are also testing Black Bean Chipotle Wrap and Meatless Meatballs in select Costco divisions.
Natural Foods. Our products are distributed to more than 3,500 natural food stores, including Whole Foods and Wild Oats. We utilize food brokers that specialize in natural foods stores.
Our ability to expand distribution in each of the described channels will depend in part on consumer preferences, and to a certain extent on continuation of the current trends of health awareness. There is always a risk that further development of low fat red or white meat products or technological advances that limit food-borne disease risks may lead to a change in consumer preferences and reduce demand for meat replacement products. Demand for our products may be adversely affected by external factors, including dietary concerns about carbohydrates and ingredient preferences, which may occur rapidly and without warning. Because of our current dependence on meatless burgers and meat analogs, any changes in consumer preferences or increase in competition in the meat alternative market segment would adversely affect our business to a greater degree than if we had multiple product lines.
We sell our products in North America, primarily through more than 100 independent, commissioned food brokers and more than 800 active distributors. The retail food brokers are independent sales organizations, which have close working relationships with the leading grocery chains, club stores and natural food stores. The food brokers arrange for sales of Gardenburger products, which we then ship and bill directly to the retailers. Products sold into the food service channel are purchased directly by distributors, which arrange for shipment by temperature-controlled truck to their frozen storage warehouses in principal cities throughout the U.S. for distribution to U.S. food service outlets and some Canadian grocery and food service outlets. Sales to distributors and retailers are final sales and, historically, we have not experienced significant levels of return product requests.
We have no non-cancelable long-term contracts with our food brokers or distributors and occasionally change brokers or distributors in an effort to increase coverage in a geographic region. We could experience a substantial temporary or permanent decline in net sales if one or more of our major food brokers or distributors were to discontinue handling our products, go out of business, or decide to emphasize distributing products of our competitors.
12
Contract Management Companies, which manage cafeterias and other institutional eating establishments, also purchase our products. Examples of the additional points of food service distribution reached through the Contract Management Companies include academic institutions, hotels, amusement parks and sports stadiums. Contract Management Companies typically purchase our products through distributors and provide us with an additional means to distribute our products.
The following table lists selected retailers, distributors and food service outlets that offer our products for sale to consumers:
Retail |
|
|
Grocery | ||
A&P | ||
AWG | ||
Albertsons | ||
Burris Foods Wholesale | ||
C&S Wholesale | ||
Demoulas | ||
Dillon’s Stores | ||
Dominick’s | ||
Fleming Wholesale | ||
Fred Meyer | ||
Giant Eagle | ||
Giant Food | ||
Hannaford | ||
Jewel | ||
King/Cullen | ||
King Soopers | ||
Kroger | ||
Marsh | ||
Meijers | ||
Publix Super Markets | ||
QFC | ||
Rainbow Foods | ||
Raley’s | ||
Ralph’s | ||
Randall’s | ||
Safeway | ||
Shaw’s | ||
Smith’s | ||
Shoprite | ||
Stop and Shop | ||
Supervalu Wholesale | ||
Thriftway | ||
Tops |
|
|
Von’s | ||
Wakefern | ||
Wal-Mart | ||
Wegmans | ||
White Rose Wholesale | ||
Winn-Dixie | ||
Natural Foods | ||
Wild Oats | ||
Whole Foods | ||
Club Stores | ||
Costco | ||
Food Service | ||
Distributors | ||
Food Services of America Dot Foods | ||
Sysco | ||
Gordon Food Service | ||
Reinhart Food Service | ||
U. S. Foodservice | ||
Restaurants | ||
Applebee’s | ||
Arctic Circle | ||
A&W | ||
Blimpie | ||
Burgerville | ||
Dairy Queen | ||
Damon’s | ||
Flamers | ||
Foster Freeze | ||
Fuddruckers | ||
IHOP | ||
Lyons | ||
Red Robin | ||
Subway | ||
T.G.I. Friday’s | ||
Hotels | ||
Marriott | ||
Sheraton | ||
Universities | ||
Colorado University | ||
DePaul | ||
Harvard | ||
Indiana University | ||
Johns Hopkins University | ||
MIT | ||
Princeton | ||
Purdue | ||
Stanford | ||
University of California, Berkeley | ||
UCLA | ||
University of Chicago | ||
USC | ||
Sports/Entertainment | ||
Dodger Stadium | ||
Yankee Stadium | ||
Rose Garden Arena | ||
Six Flags | ||
Universal Studios | ||
Contract Management Companies | ||
ARAMARK | ||
Avendra | ||
Foodbuy | ||
Gukenheimer | ||
Sodexho |
13
Geographic Sales
To date, we have focused our sales efforts primarily in North America, and international sales have not been material.
Sales and Marketing
Sales. Our sales objective is to manage a strong market position with our veggie burgers and other meat alternative products in the retail grocery, food service, club store and natural foods store channels and to continue our expansion beyond veggie burgers in the meat alternative category. Our use of regional food brokers as our representatives allows us to maintain contact with the nation’s major retail grocery chains and food service outlets without a large internal sales force. Brokers are paid sales commissions on all products sold.
Our regional sales force is located strategically in our primary geographic sales regions and in proximity to our brokers and is divided into a food service division and a retail and club division. The regional sales directors have substantial sales and industry experience. These regional sales directors coordinate the efforts of the food brokers and distributors.
Marketing. Our marketing efforts focus on key seasonal periods for healthy eating. Factors such as the aging population, obesity concerns and consumer interest in good-for-you products and functional foods will stimulate future consumer acceptance. We utilize in-store vehicles, targeted marketing, website communication and public relations campaigns to market our products.
Research and Development
Our research and development activities are focused on identifying existing nutritional benefits and selectively adding benefits important to vegetarians, as well as improvement and increased efficiency in the manufacturing process. We continue to develop non-burger items such as breakfast sausage, cutlets and nuggets to meet the needs of the variety-seeking consumer. We conduct our research and development activities at our facilities in Clearfield, Utah. In fiscal 2005, 2004 and 2003, we spent approximately $357,000, $272,000 and $235,000, respectively, on research and development activities, which are included in sales and marketing expense.
Manufacturing
Our 122,000 square-foot Clearfield facility handles multiple manufacturing lines for our products. We believe the Clearfield facility will be able to support our growth plans for the foreseeable future.
The manufacturing process involves cleaning, chopping and mixing the ingredients; then forming, baking and quick-freezing the products and finally packaging them. The manufacturing process at our Clearfield facility is highly automated, mixing and baking products in assembly-line fashion with minimal human interaction. The Clearfield facility also utilizes proprietary ovens that quickly cook the products. Products are shipped, fully cooked, frozen and packaged, via temperature controlled trucks to distributors throughout North America.
We consider food safety a high priority and have prepared, in conjunction with government agencies, a Hazard Analysis and Critical Control Point (“HACCP”) system and other programs directed at ensuring the safety of our products. HACCP is a comprehensive system that food companies use to monitor specific steps in food production to identify safety issues. Using this type of system, we can focus on the areas in which greatest risks exist and implement preventive measures.
A significant disruption in our Clearfield facility’s production capacity as a result of, for instance, fire, severe weather, regulatory actions, work stoppages or other factors, could disable our capacity to manufacture our products. If our meat alternative products become less available, consumers may switch to another brand of products and grocery stores may reduce shelf space allocated to our products. Any significant unplanned disruption in manufacturing would likely have a material adverse effect on our results of operations and financial condition.
14
Seasonality
The third and fourth quarters of our fiscal year typically have stronger sales due to the summer grilling season. We typically build inventories during the first and second quarters of each fiscal year in anticipation of increased sales in the third and fourth fiscal quarters, although in fiscal 2005, we reduced inventory levels that had built up over the 2002 to 2004 time period in order to improve cash flow and liquidity.
Competition
The market for veggie burgers and other meat alternative products is highly competitive. Our products compete primarily on the basis of brand preference, taste, innovation, quality of natural ingredients, ease of preparation, availability, price and consumer awareness. We believe that our products compare favorably to those offered by our competitors in all of these areas. We price our products competitively to our primary competitors, although competitors exhibited more aggressive promotional pricing in fiscal 2005 than we did. The calorie and fat content of Gardenburger® products is generally equivalent to that of competitors’ products. According to AC Nielsen, sales of our Gardenburger products represented 9.2% and 10.5% of meatless category sales during fiscal 2005 and fiscal 2004, respectively.
We believe that our principal competitors are The Kellogg Company, which distributes its products under the “Morningstar Farms” brand name to the food service, retail grocery, club and natural food channels; and Kraft Foods, which distributes soy-based meat analog products primarily in the food service, retail grocery, club and natural food channels under the “Boca Burger” label. These companies have substantially greater financial and marketing resources than us. In addition, other major national food products companies could decide to produce meat alternative products at any time in the future.
Our products also compete indirectly with other low fat meat products, such as ConAgra’s Healthy Choice 96% Extra Lean Ground Beef burger, and chicken or turkey based low fat products distributed by several large companies such as Tyson Foods, and with frozen, mass-produced low calorie/low fat entrees, including national brands such as Healthy Choice, Lean Cuisine and Smart Ones. Large companies with substantially greater financial resources, name recognition and marketing resources than us produce these products.
Significant Customers
Sysco Foods (“Sysco”) and Dot Foods, Inc. (“Dot”) accounted for approximately 14% and 13%, respectively, of our fiscal 2005 gross sales before trade discounts. At September 30, 2005, Sysco, Dot and C&S Wholesale Grocers, Inc. (“C&S”) accounted for approximately 14%, 25% and 9% of the gross outstanding accounts receivable balance, respectively.
Sysco is a food service distributor and sells our products to restaurants, hotels, and other food service customers. Dot is a redistributor; they sell our products to other, smaller distributors. C&S is a retail food distributor and sells our products to grocery stores. The loss of these customers could have a material adverse effect on our business; however, there are competing distributors through which our products could be purchased by the end users.
Sources of Supply
We use natural ingredients such as mushrooms, oats, rice, onions and soy protein. These are common agricultural items typically available in most parts of the United States. In addition, we use packaging and other materials that are common in the food industry. As a result, we believe, but cannot guarantee, that our sources of supply are reasonably reliable and that we are at no greater risk regarding supply issues than other similar food processors and producers.
Employees
As of September 30, 2005, we had approximately 156 full-time equivalent employees, with approximately 135 of them employed at our Clearfield facility. None of our employees are subject to a collective bargaining agreement, and we believe our relations with our employees to be good.
15
Intellectual Property
We have 22 U.S. registered trademarks, including “Gardenburger,” “Gardenburger Hamburger Classic,” and “GardenSausage.” We have registered certain trademarks in Australia, Canada, France, Germany, Japan, Mexico and the United Kingdom, along with other smaller countries.
We actively monitor use of our trademarks by food service customers and others and take action we believe appropriate to halt infringement or improper usage. We defend our intellectual property aggressively and, from time to time, have been engaged in infringement protection activities. Nonetheless, in the event third parties infringe or misappropriate our trademarks, we may have to incur substantial costs to protect our intellectual property or risk losing our rights. Any large expenditure or loss of rights could have a material adverse effect on our results of operations, cash flows and financial position.
We generally do not seek patents for our recipes or production methods and, therefore, can protect them only as trade secrets. Some or all of these trade secrets could be obtained by others or could enter the public domain, which could place us at a competitive disadvantage.
In an effort to protect our trade secrets, all of our employees sign an “Employees Proprietary Rights and Confidentiality Agreement,” which states that they will not disclose our manufacturing processes, recipes, customer lists or other confidential material vital to our business. In addition, senior sales, marketing and administrative personnel sign non-compete agreements, which prohibit them from working for a competitor for specified periods of time upon the termination of their employment with Gardenburger.
Management Information Systems
We utilize a single Baan enterprise resource planning system, which is expected to meet our information system needs for the foreseeable future. In addition to integrating manufacturing, sales and accounting functions, the Baan system provides real-time information for management analysis and use in operations. The Baan system aids management with production planning (planning of raw material purchases) and demand forecasting (matching supply to distribution centers with order volume) capabilities. The Baan system also includes pallet tagging, bar coding and scanning applications that facilitate tracking of raw materials and finished goods through our manufacturing operation. The Baan system enables us to use electronic data interchange (“EDI”) if desired by customers and suppliers, which we believe expedites order entry, payment and cash collection processes.
Government Regulation
The manufacturing, packaging, storage, distribution and labeling of food products are subject to extensive federal and state laws and regulations. The FDA has issued regulations governing the ingredients that may be used in food products, the content of labels on food products and the labeling claims that may be made for foods. Foods may only include additives, colors and ingredients that are either approved by the FDA or generally recognized as safe. Our products must be manufactured in compliance with the FDA’s current Good Manufacturing Practice regulations applicable to food.
Regulators have broad powers to protect public health, including the power to inspect our products and facilities, to order the shutdown of a facility or to seize or stop shipment of our products and order a recall of previously shipped products, as well as the power to impose substantial fines and seek criminal sanctions against us or our officers. While we currently carry $1 million of insurance against the cost of a product recall, a significant recall could have an adverse effect on our results of operations, cash flows and financial condition. In addition, negative publicity may result if regulators take any of the foregoing actions against us or if we were to voluntarily recall products to avoid regulatory enforcement.
16
Insurance
We maintain insurance against various risks related to our business. This includes property and casualty, business interruption, director and officer liability, food spoilage, product liability, product recalls and workers’ compensation insurance. We currently maintain $1 million of product recall insurance coverage, $2 million of product liability insurance coverage and $20 million of general umbrella coverage. We consider our policies adequate to cover the major risks in our business, but there can be no assurance that this coverage will be sufficient to cover the cost of defense or damages in the event of a significant product liability claim.
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our actual results may differ materially from the results projected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, the following:
If we are unable to successfully implement a plan of reorganization under Chapter 11 of the United States Bankruptcy Code, we ultimately may need to consider other alternatives, including, but not limited to, a Chapter 7 liquidation.
On October 14, 2005, we filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Central District of California, Santa Ana Division (the “Bankruptcy Court”) (Case No. SA 05-19539-JB) (the “Chapter 11 Case”). In connection with this Chapter 11 Case, on December 9, 2005, we filed a Plan of Reorganization (the “Plan”) and a related Disclosure Statement with the Bankruptcy Court.
In addition, we have received a report from our independent registered public accounting firm regarding our financial statements for the fiscal year ended September 30, 2005 that included an explanatory paragraph which stated that the financial statements have been prepared assuming we will continue as a going concern. The explanatory paragraph stated that the uncertainty regarding the outcome of our Chapter 11 case raised substantial doubt about our ability to continue as a going concern.
As a result of our financial condition and our Chapter 11 Case, we may find it difficult to operate our business in a normal fashion. In addition, our Chapter 11 Case could adversely affect our ability to enter into collaborative relationships with business partners and our ability to sell our products and could have a material adverse effect on our business, financial condition and results of operations.
Our success depends on our ability to attract and retain key personnel.
We believe that our success will depend, in part, on the continuing services of our key management personnel. The loss of the services of key personnel could have a material impact on our financial results. We have entered into retention agreements with our key management personnel in order to help ensure their continued service throughout our Chapter 11 Case. However, we cannot be assured that such retention agreements will be adequate incentive to retain our key management while we are in bankruptcy proceedings. Additionally, our success may depend on our ability to attract and retain additional skilled management personnel.
Our success depends on our ability to judge the impact of competitive products and pricing.
Successful operation of our business requires the ability to identify the effects of product and pricing trends. If we are unable to evaluate the impact of product or pricing trends effectively, we may fail to implement strategies allowing us to capitalize on those trends, which may result in decreased sales or increased costs.
Our success depends on our ability to compete with our competitors.
The foodservice industry is intensely competitive with respect to the quality and value of food products offered and price. Many of our competitors have substantially greater financial, marketing, operating and other resources than we have, which may give them competitive advantages. Our competitors
17
could also make changes to pricing or other marketing strategies which may impact us detrimentally. As our competitors expand operations, we expect competition to intensify. Such increased competition could have a material adverse effect on our financial position and results of operations.
We face commodity price and availability risks.
We purchase energy and agricultural products that are subject to price volatility caused by weather, market conditions and other factors that are not predictable or within our control. Increases in commodity prices could result in lower operating margins. Occasionally, the availability of commodities can be limited due to circumstances beyond our control. If we are unable to obtain such commodities, we may be unable to offer related products, which would have a negative impact on our profitability.
We depend on our suppliers to deliver quality products to us timely.
Our profitability is dependent on, among other things, our continuing ability to offer fresh, high-quality food at moderate prices. Our dependence on frequent deliveries of food and paper products subjects our business to the risk that shortages or interruptions in supply, caused by adverse weather or other conditions, could adversely affect the availability, quality and cost of ingredients. Any disruption in these distribution services could have a material adverse effect on our financial position and results of operations.
Consumer preferences and perceptions may have significant effects on our business.
Foodservice businesses are often affected by changes in consumer tastes and perceptions. Foodservice businesses such as ours can also be affected materially and adversely by publicity resulting from poor food quality, illness, injury or other health concerns or operating issues stemming from one or a limited number of products. We can be similarly affected by consumer concerns with respect to the nutritional value of our products.
Our business may be impacted by increased insurance costs.
We may be negatively affected by rising healthcare costs. Although we seek to manage our claims to prevent increases, such increases can occur unexpectedly and without regard to our efforts to limit them. If such increases occur, we may be unable to pass them along to the consumer through product price increases, resulting in decreased operating results.
The nature of our business exposes us to potential litigation.
We have thousands of interactions or transactions each day with vendors, customers, employees and others. In the ordinary course of business, disputes may arise for a number of reasons. We may also be subject to liability claims or product recalls for products to be distributed in the future or products that have already been distributed. We cannot be certain that we will prevail in every legal action brought against us.
Governmental regulations may change and require us to incur substantial expenditures to comply.
We are subject to governmental regulation at the federal, state and local level in many areas of our business, such as food safety and sanitation, environmental issues and minimum wage. Governmental entities may change regulations that may require us to incur substantial cost increases in order to comply with such laws and regulations. While we endeavor to comply with all applicable laws and regulations, we cannot assure you that we are in full compliance with all laws and regulations at all times or that we will be able to comply with any future laws or regulations. If we fail to comply with applicable laws and regulations, we may be subject to sanctions or civil remedies, including fines and injunctions. The cost of compliance or the consequences of non-compliance could have a material adverse effect on our business and results of operations.
Compliance with environmental laws may affect our financial condition.
We are subject to various federal, state and local environmental laws. These laws govern discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes. These laws may also impose liability for damages from and the costs of cleaning up sites of spills, disposals or other releases of hazardous materials. We may be responsible for environmental conditions or
18
contamination relating to our facilities and the land on which our facilities are located, regardless of whether we lease or own the facility or land in question and regardless of whether such environmental conditions were created by us or by a prior owner or tenant. The costs of any cleanup could be significant and have a material adverse effect on our financial position and results of operations.
Evolving regulation of corporate governance and public disclosure may result in additional expenses and continuing uncertainty.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and new SEC regulations are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.
We may have difficulty implementing, in a timely manner, the internal control procedures necessary to allow our management to report on the effectiveness of our internal control.
Pursuant to Section 404 of Sarbanes-Oxley and the rules and regulations promulgated thereunder by the SEC, we will be required to furnish an internal control report of management’s assessment of the effectiveness of our internal control as part of our Annual Report on Form 10-K for the fiscal year ending September 30, 2007. Our auditors will then be required to attest to, and report on, our assessment. In order to issue our report, our management must document both the design of our internal control and the testing processes that support management’s evaluation and conclusion. Our management has begun the necessary processes and procedures for issuing its report on our internal control. However, we may face significant challenges in implementing the required processes and procedures. There can be no assurance that we will be able to complete the work necessary for our management to issue its management report in a timely manner, or that management will be able to report that our internal control over financial reporting is effective. See also Item 9A for further discussion and analysis of our internal control procedures.
We lease approximately 5,200 square feet of administrative office space in Irvine, California pursuant to an operating lease with an initial term of three years. Current monthly rent is approximately $11,300. This lease expires October 31, 2006 and has one renewal option for 24 months.
We lease 122,000 square feet of production space at Freeport Center, Building A-16, in Clearfield, Utah, pursuant to a lease that will terminate on December 31, 2007. We have the option to renew the lease for one additional five-year term commencing January 1, 2008. The monthly rent on this facility is currently $41,000. Our Clearfield, Utah production facility can support sales levels of approximately $220 million at current pricing levels. Given our current level of sales, we are operating the facility at approximately 35% of overall capacity.
We also lease approximately 6,000 square feet of storage space at the Freeport Center in Clearfield on a month-to-month basis. The monthly rent for the storage space is approximately $1,000.
19
There are currently no material, pending legal proceedings to which we are a party. From time to time, we become involved in ordinary, routine or regulatory legal proceedings incidental to our business.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter ended September 30, 2005.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock trades on the over-the-counter market and is quoted on the NASD’s OTC Bulletin Board. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The high and low bid quotations for the last two fiscal years were as follows:
Fiscal 2004 |
| High |
| Low |
| ||
Quarter 1 |
| $ | 0.54 |
| $ | 0.20 |
|
Quarter 2 |
| 0.40 |
| 0.27 |
| ||
Quarter 3 |
| 0.36 |
| 0.21 |
| ||
Quarter 4 |
| 0.28 |
| 0.16 |
| ||
Fiscal 2005 |
| High |
| Low |
| ||
Quarter 1 |
| $ | 0.21 |
| $ | 0.07 |
|
Quarter 2 |
| 0.15 |
| 0.03 |
| ||
Quarter 3 |
| 0.13 |
| 0.06 |
| ||
Quarter 4 |
| 0.09 |
| 0.05 |
| ||
The number of shareholders of record and approximate number of beneficial owners of our common stock at December 12, 2005 were 725 and 4,000, respectively.
There were no cash dividends declared or paid in fiscal 2005 or 2004 on our common stock and we do not anticipate declaring cash dividends on our common stock in the foreseeable future. Under the terms of our loan agreement with CapitalSource Finance LLC, we may not pay any cash dividends or other distributions with respect to, or redeem any of, our capital stock. We also may not, without the consent of Annex Holdings I LP (“Annex”), the current holder of our convertible senior subordinated note, declare or pay any cash dividends or make any distributions with respect to our capital stock or other equity securities to the extent that at least $5 million in principal amount remains outstanding under our convertible senior subordinated note and Annex owns a majority of the then outstanding principal amount of such notes.
In addition, no cash dividends may be paid on our common stock unless dividends have been paid on all outstanding shares of our Series C and Series D Convertible Preferred Stock in an amount equal to 12% cumulative dividends accrued on such preferred shares through the record date for the common stock dividend (or, if greater, the amount of the common stock dividend payable on the preferred shares on an as-converted basis). The quarterly dividend accruing on the preferred shares is $975,000.
There were no sales of unregistered securities during fiscal 2005 and we did not purchase any of our outstanding securities during the fourth quarter of fiscal 2005. Information regarding securities authorized for issuance under equity compensation plans is included in Item 12.
20
Item 6. Selected Financial Data
|
| Year Ended September 30, |
| |||||||||||||
In thousands, except per share amounts |
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| 2001 |
| |||||
Statement of Operations Data(1) |
|
|
|
|
|
|
|
|
|
|
| |||||
Net sales |
| $ | 46,055 |
| $ | 48,580 |
| $ | 49,447 |
| $ | 54,596 |
| $ | 50,751 |
|
Gross margin |
| 15,960 |
| 16,307 |
| 18,738 |
| 22,907 |
| 18,193 |
| |||||
Sales and marketing expense |
| 12,213 |
| 13,844 |
| 14,208 |
| 13,711 |
| 13,586 |
| |||||
General and administrative expense |
| 6,105 |
| 3,898 |
| 5,218 |
| 4,210 |
| 4,997 |
| |||||
Other operating (income) expense, net |
| (20 | ) | (16 | ) | 105 |
| 184 |
| 57 |
| |||||
Operating (loss) income |
| (2,338 | ) | (1,419 | ) | (793 | ) | 4,802 |
| (447 | ) | |||||
Interest expense, net |
| (7,114 | ) | (4,618 | ) | (4,409 | ) | (3,721 | ) | (2,342 | ) | |||||
Cumulative effect of a change in accounting for slotting fees |
| — |
| (1,150 | ) | — |
| — |
| — |
| |||||
Cumulative effect of a change in accounting for goodwill |
| — |
| — |
| (411 | ) | — |
| — |
| |||||
Preferred dividends and accretion |
| 4,501 |
| 4,839 |
| 5,177 |
| 4,955 |
| 4,367 |
| |||||
Net loss applicable to common shareholders |
| $ | (13,953 | ) | $ | (12,026 | ) | $ | (10,790 | ) | $ | (3,874 | ) | $ | (7,156 | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Basic and diluted loss per share before cumulative effect of a change in accounting principle |
| $ | (1.55 | ) | $ | (1.21 | ) | $ | (1.15 | ) | $ | (0.43 | ) | $ | (0.80 | ) |
Basic and diluted loss per share for cumulative effect of a change in accounting principle |
| — |
| (0.13 | ) | (0.05 | ) | — |
| — |
| |||||
Basic and diluted net loss per share applicable to common shareholders |
| $ | (1.55 | ) | $ | (1.34 | ) | $ | (1.20 | ) | $ | (0.43 | ) | $ | (0.80 | ) |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
| |||||
Working capital (deficit) |
| $ | (30,370 | ) | $ | (616 | ) | $ | 5,937 |
| $ | 10,245 |
| $ | 9,857 |
|
Total assets |
| 19,861 |
| 24,484 |
| 28,228 |
| 31,062 |
| 22,061 |
| |||||
Long-term debt, less current maturities |
| — |
| 3,513 |
| 4,979 |
| 6,540 |
| — |
| |||||
Convertible note payable |
| 27,988 |
| 19,392 |
| 18,672 |
| 17,596 |
| 17,364 |
| |||||
Convertible redeemable preferred stock |
| 60,352 |
| 55,851 |
| 51,012 |
| 45,835 |
| 40,880 |
| |||||
Total shareholders’ deficit |
| (81,979 | ) | (68,026 | ) | (56,000 | ) | (45,210 | ) | (41,431 | ) |
(1) Net sales and sales and marketing expenses each decreased by $8,806 in fiscal 2001 upon adoption of FASB EITF 00-14, “Accounting for Certain Sales Incentives,” and EITF 00-25, “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products.”
21
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and we intend that such forward-looking statements be subject to the safe harbors created thereby. Words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” “should,” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our businesses, or other characterizations of future events or circumstances are forward-looking statements. The forward-looking statements included herein are based on current expectations and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that may cause or contribute to such differences include, but are not limited to: (i) consumers’ concerns or adverse publicity regarding our products; (ii) effectiveness of operating initiatives and advertising and promotional efforts; (iii) changes in consumer preferences; (iv) the availability and pricing of competitive products; (v) changes in our suppliers’ ability to provide quality and timely products to us; (vi) availability of financing; (vii) new legislation or government regulation concerning packaging or our ability to produce or sell our products; (viii) the availability of distributors, such as retail grocery stores, food services outlets, such as restaurants, club stores and natural food stores to carry our products; (ix) the success of our research and development activities to develop new meat alternative products; (x) the availability of our manufacturing facilities; and (xi) the costs to protect our intellectual property rights. Readers should carefully consider these risks, as well as the additional risks described elsewhere in this Annual Report on Form 10-K. We undertake no obligation to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Going Concern and Chapter 11 Filing
Our financial statements have been presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, we were out of compliance with certain debt covenants as of June 30, 2005 and September 30, 2005. Because of such non-compliance, we classified all of our outstanding debt as current beginning with our June 30, 2005 balance sheet. In addition, as a result of CapitalSource Finance, LLC (“CapitalSource”) and Annex Holdings I LP (“Annex”) having the ability to call our debt at any point in time, all related exit fees were accrued and all remaining deferred financing fees were written off during the third quarter of fiscal 2005.
Both CapitalSource and Annex currently have the right to declare all of the outstanding amounts due to them under their respective agreements immediately due and payable; however, the outstanding indebtedness due and payable to CapitalSource was refinanced as described below. We do not currently have the cash or alternative financing source needed in order to pay such amounts. In addition, we have a working capital deficit, incurred substantial net losses applicable to common shareholders for fiscal years 2005, 2004 and 2003 and had negative operating cash flow in 2004. We had a total shareholders’ deficit at September 30, 2005 of $82.0 million. We are highly leveraged and have significant annual interest and dividend accruals related to our convertible note payable and convertible redeemable preferred stock, which contribute to our net losses and shareholders’ deficit.
Operating under this heavy debt burden and facing a continuing decline in our product category and increased competition during 2005, we determined that in order to maximize value for our creditors and, if feasible, preferred shareholders, we moved forward with an effort to sell our business as a going concern. We made this decision recognizing (i) the likelihood that we did not have sufficient resources or credit availability to effectively defend our market share in the grocery channel under existing circumstances, (ii) the significant risk that our enterprise value would further erode if we continued to operate our business on a highly leveraged basis, and (iii) that there was substantial
22
doubt, if we continued to operate under our existing debt burden, regarding our ability to continue as a going concern. Based on our going concern sale efforts in fiscal 2005, we have determined that the value of Gardenburger is inadequate to allow for any recovery or retention of rights by our equity holders.
Following several unsuccessful efforts to sell Gardenburger as a going concern over the past six years, including our fiscal 2005 efforts, as well as unsuccessful efforts to restructure and recapitalize Gardenburger, partially due to a lack of consensus between Annex and our preferred shareholders regarding distribution of the proceeds of a sale and the allocation of rights under a restructuring, on October 14, 2005, we filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Central District of California, Santa Ana Division (the “Bankruptcy Court”) (Case No. SA 05-19539-JB) (the “Chapter 11 Case”). In connection with this Chapter 11 Case, on December 9, 2005, we filed a Plan of Reorganization (the “Plan”) and a related Disclosure Statement with the Bankruptcy Court.
Significant terms of the Plan are as follows:
• Amounts due to holders of general unsecured claims will be fully paid over an 18 month period;
• All outstanding preferred stock and common stock will be terminated with no compensation to the holders thereof, thereby converting Gardenburger to a privately held company from a publicly held company;
• Elimination of all principal, accrued interest and accrued exit fees due pursuant to our Note Purchase Agreement, as amended, and Second Amended and Restated Convertible Senior Subordinated Note, as amended (the “Convertible Note”) held by Annex, which totaled $28.0 million as of September 30, 2005, and issuance of new equity interests in Gardenburger to Annex in full satisfaction of this claim;
• Payment of all principal and accrued interest due pursuant to our Revolving Credit and Term Loan Agreement, as amended (the “Loan Agreement”) with CapitalSource, which totaled approximately $8.2 million as of September 30, 2005; and
• Ongoing operation of our business on a viable basis following confirmation of the Plan.
We will continue to operate our business in the ordinary course as debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code.
Bankruptcy law does not permit solicitation of acceptances of the Plan until the Bankruptcy Court approves the applicable Disclosure Statement relating to the Plan as providing adequate information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor’s books and records, that would enable a hypothetical reasonable investor typical of the holder of claims or interests of the relevant class to make an informed judgment about the Plan. Accordingly, this is not intended to be, nor should it be construed as, a solicitation for a vote on the Plan. We will emerge from the Chapter 11 Case if and when the Plan is confirmed by the Bankruptcy Court.
The filing of the Chapter 11 Case constituted events of default under our Loan Agreement with CapitalSource and our Convertible Note held by Annex. As a result of the events of default, all debt outstanding under such loan documents became automatically and immediately due and payable. As of September 30, 2005, the amount of outstanding debt and accrued interest under the Loan Agreement was approximately $8.2 million, which was paid on November 22, 2005 utilizing proceeds from our debtor-in-possession credit facilities discussed below. The amount of outstanding debt under the Convertible Note was approximately $28.0 million as of September 30, 2005. We believe that any effort of Annex to enforce their rights under the Convertible Note will be stayed as a result of the filing of the Chapter 11 Case. In any event, we understand that Annex does not currently contemplate any such action and that Annex supports the Plan.
23
Debtor-in-Possession Credit Facilities
In connection with the Chapter 11 Case, on October 17, 2005, and as approved by the Bankruptcy Court on October 18, 2005, we entered into an interim financing arrangement with CapitalSource. In addition, senior and second lien credit facilities with Wells Fargo Bank, National Association, acting through its Wells Fargo Business Credit operating division (“WFBC”), and GB Retail Funding, LLC (“GB”), respectively, were approved by the Bankruptcy Court on November 16, 2005.
We require credit facilities for use during the Chapter 11 Case (“DIP Financing”) and to meet our working capital needs and fund our obligations under the Plan upon and following the effective date of the Plan (“Exit Financing”).
The WFBC credit facilities provide for a secured revolving line of credit (the “WFBC Revolving Credit Facility”) in an amount not to exceed $7.5 million and a secured equipment term loan (the “WFBC Term Credit Facility”) of $2.2 million. As of December 14, 2005, the amounts outstanding under the WFBC Revolving Credit Facility and the WFBC Term Credit Facility were $0.4 million and $2.2 million, respectively. Upon the effective date of the Plan that is satisfactory to WFBC, the WFBC credit facilities will convert to Exit Financing facilities by automatically extending the maturity date of the WFBC credit facilities to the date thirty-six months after the date of closing of the WFBC credit facilities (November 22, 2008). The WFBC credit facilities were used to refinance our CapitalSource debt and will provide for ongoing working capital needs and for payment of obligations under, and in accordance with, the Plan. All loans, advances and obligations under the WFBC credit facilities are secured by first priority security interests on all of our assets and reorganized Gardenburger, except general intangible assets (i.e., intellectual property, trademarks, brand names and domain names) and proceeds thereof.
The amount available under the WFBC Revolving Credit Facility is the lesser of (i) $7.5 million or (ii) up to the sum of: (i) 85% of eligible accounts receivable and (ii) the lesser of (a) $4.5 million or (b) the lesser of (x) 44.9% of eligible raw materials inventory plus 63.4% of eligible finished goods inventory or (y) 85% of the appraised net orderly liquidation value of eligible raw material inventory and eligible finished goods inventory, less (iii) reserves maintained by WFBC. The interest rate on the WFBC Revolving Credit Facility is the Prime Rate plus 0.50% per annum floating, payable monthly in arrears calculated on the basis of actual days elapsed in each year of 360 days. We or reorganized Gardenburger may also elect to fix the rate of interest on portions of revolving advances at an interest rate equal to 3.25% over Wells Fargo LIBOR. The default rate of interest will be 3.00% higher than the rate otherwise payable. A fee of 0.50% per annum on the unused portion of the WFBC Revolving Credit Facility will be payable monthly in arrears. As of December 14, 2005, we had $0.4 million outstanding on the WFBC Revolving Credit Facility at an interest rate of 7.75% and $3.1 million available for future use. We utilized $0.7 million of the proceeds from this facility to pay off the entire balance owed to CapitalSource pursuant to their Loan Agreement and, accordingly, as of the date of the filing of this Form 10-K, we do not owe any amounts to CapitalSource.
The initial amount available under the WFBC Term Credit Facility was $2.2 million. The interest rate on the WFBC Term Facility is the Prime Rate plus 1.00% per annum floating, payable monthly in arrears, calculated on the basis of actual days lapsed in a year of 360 days. We or reorganized Gardenburger may also elect to fix the rate of interest on portions of term advances at an interest rate equal to 3.75% over Wells Fargo LIBOR. The default rate of interest will be 3.00% higher than the rate otherwise payable. As of December 14, 2005, we had $2.2 million outstanding on the WFBC Term Credit Facility at an interest rate of 8.25%.
Pursuant to the Credit and Security Agreement, dated November 22, 2005, governing the WFBC credit facilities (the “WFBC Credit Agreement”), we are required to comply with certain financial covenants, which are described below:
24
(a) We are required to maintain a minimum Availability (as defined in the WFBC Credit Agreement) as follows:
Dates |
| Minimum Availability |
| |
11/22/05 through 12/02/05 |
| $ | 2,000,000 |
|
12/03/05 through 12/30/05 |
| $ | 1,750,000 |
|
12/31/05 and at all times thereafter |
| $ | 1,500,000 |
|
(b) We are required to achieve Net Cash Flow (as defined in the WFBC Credit Agreement) in an amount not less than the amount set forth below for the periods set forth below:
Test Period |
| Minimum Net Cash Flow |
| |
10/01/05 through 12/02/05 |
| $ | (900,000 | ) |
10/29/05 through 12/30/05 |
| $ | (600,000 | ) |
12/03/05 through 01/27/05 |
| $ | (1,800,000 | ) |
12/31/05 through 02/24/06 |
| $ | 200,000 |
|
(c) We are required to achieve, for each period described below, gross sales of not less than the amount set forth for each such period:
Period |
| Minimum Gross Sales |
| |
10/01/05 through 10/31/05 |
| $ | 3,600,000 |
|
11/01/05 through 11/30/05 |
| $ | 3,000,000 |
|
12/01/05 through 12/31/05 |
| $ | 3,600,000 |
|
01/01/06 through 01/31/06 |
| $ | 4,300,000 |
|
02/01/06 through 02/28/06 |
| $ | 3,900,000 |
|
03/01/06 through 03/31/06 |
| $ | 5,100,000 |
|
04/01/06 through 04/30/06 |
| $ | 4,500,000 |
|
05/01/06 through 05/31/06 |
| $ | 5,200,000 |
|
06/01/06 through 06/30/06 |
| $ | 5,200,000 |
|
07/01/06 through 07/31/06 |
| $ | 4,700,000 |
|
(d) In the event we fail to achieve the minimum gross sales as set forth in item (c) above for any period set forth above, we are required to achieve, for the period set forth below ending on the same end date as the period for which we failed such minimum gross sales covenant, cumulative Net Sales (as defined in the WFBC Credit Agreement) of not less than the amount set forth below for the period ending on the date set forth below:
Period |
| Minimum Net Sales |
| |
10/01/05 through 10/31/05 |
| $ | 3,100,000 |
|
10/01/05 through 11/30/05 |
| $ | 5,700,000 |
|
10/01/05 through 12/31/05 |
| $ | 8,600,000 |
|
10/01/05 through 01/31/06 |
| $ | 12,100,000 |
|
10/01/05 through 02/28/06 |
| $ | 15,500,000 |
|
10/01/05 through 03/31/06 |
| $ | 19,700,000 |
|
10/01/05 through 04/30/06 |
| $ | 23,700,000 |
|
10/01/05 through 05/31/06 |
| $ | 27,800,000 |
|
10/01/05 through 06/30/06 |
| $ | 32,000,000 |
|
10/01/05 through 07/31/06 |
| $ | 36,000,000 |
|
Pursuant to the WFBC Credit Agreement, on or before February 24, 2006, Wells Fargo shall set new covenant levels for item (b) above. The new covenant levels will be based upon our projections and cash budget for such periods received by Wells Fargo pursuant to the Credit and Security Agreement and will be no less stringent than the present levels, except that with respect to item (b) above, the new covenant levels will be based on a $500,000 negative variance based upon the projections and updated cash flow budget for such periods. A copy of the Wells Credit Agreement is attached to this Annual Report on Form 10-K as Exhibit 10.74.
The GB Loan Facility consists of a $5.0 million secured single-advance term loan. This facility is secured by a second priority lien in all collateral securing the WFBC credit facilities, except that it is secured by a first priority perfected security interest in all of our general intangible assets (i.e.,
25
intellectual property, trademarks, brand names and domain names) and proceeds thereof. The interest rate on the GB Loan Facility is the Prime Rate plus 6.75% per annum floating, payable monthly in arrears. As of December 14, 2005, we had $4.9 million outstanding on the GB Loan Facility at an interest rate of 14.0%. Upon the effective date of the Plan that is satisfactory to GB, the GB Loan Facility will convert to an Exit Financing facility by automatically extending the maturity date of the GB Loan Facility to the date thirty-six months after the date of closing of the GB Loan Facility (November 22, 2008).
Pursuant to the Credit and Security Agreement, dated November 22, 2005, governing the GB Loan Facility (the “GB Credit Agreement”), we are required to comply with certain financial covenants that are identical to the financial covenants described above in connection with the WFBC credit facilities. A copy of the GB Credit Agreement is attached to this Annual Report on Form 10-K as Exhibit 10.75.
As of December 2, 2005, we were in compliance with all of the financial covenants described above.
General
Approximately 72% of our gross sales were attributable to the Gardenburger® veggie burger and soy burger products, with the remaining 28% attributable to our newer meat alternative products in fiscal 2005. Consumers, in general, have been moving to the wider range of meat alternative products becoming available in the marketplace. In response to this development in consumer tastes, in fiscal 2003, we added five new products, including BBQ Chik’n and Meatless Meatloaf. In the third quarter of fiscal 2004, we introduced a new line of six microwaveable meatless entrees to capitalize on the consumers’ need for convenience. Sales of this new line of Gardenburger Meals added $3.7 million of net sales in fiscal 2005. We further expanded our convenience focus with the early fiscal 2005 launch of Gardenburger Wraps, which added $1.7 million of net sales in fiscal 2005.
Our results have been adversely affected by increased competition for market share as a source of growth due to flat consumer consumption. This increased competition contributed to a 4.4% decrease in sales of our veggie burger products in fiscal 2005 compared to fiscal 2004. This comes after drops of 8.7% and 11.0% in fiscal 2004 and 2003, respectively.
Results of Operations
The following table is derived from our Statements of Operations for the periods indicated and presents our results of operations in dollars, as well as a percentage of net sales (dollars in thousands).
Year Ended September 30, |
| 2005 |
| 2004 |
| 2003 |
| |||
Net sales |
| $ | 46,055 |
| $ | 48,580 |
| $ | 49,447 |
|
Cost of goods sold |
| 30,095 |
| 32,273 |
| 30,709 |
| |||
Gross margin |
| 15,960 |
| 16,307 |
| 18,738 |
| |||
Sales and marketing expense |
| 12,213 |
| 13,844 |
| 14,208 |
| |||
General and administrative expense |
| 6,105 |
| 3,898 |
| 5,218 |
| |||
Other operating (income) expense, net |
| (20 | ) | (16 | ) | 105 |
| |||
Operating loss |
| (2,338 | ) | (1,419 | ) | (793 | ) | |||
Interest expense, net |
| (7,114 | ) | (4,618 | ) | (4,409 | ) | |||
Loss before cumulative effect of a change in accounting for slotting fees and goodwill and before preferred dividends |
| (9,452 | ) | (6,037 | ) | (5,202 | ) | |||
Cumulative effect of a change in accounting for slotting fees |
| — |
| (1,150 | ) | — |
| |||
Cumulative effect of a change in accounting for goodwill |
| — |
| — |
| (411 | ) | |||
Net loss |
| (9,452 | ) | (7,187 | ) | (5,613 | ) | |||
Preferred dividends |
| 4,501 |
| 4,839 |
| 5,177 |
| |||
Net loss applicable to common shareholders |
| $ | (13,953 | ) | $ | (12,026 | ) | $ | (10,790 | ) |
26
Year Ended September 30, |
| 2005 |
| 2004 |
| 2003 |
|
Net sales |
| 100.0 | % | 100.0 | % | 100.0 | % |
Cost of goods sold |
| 65.3 |
| 66.4 |
| 62.1 |
|
Gross margin |
| 34.7 |
| 33.6 |
| 37.9 |
|
Sales and marketing expense |
| 26.5 |
| 28.5 |
| 28.7 |
|
General and administrative expense |
| 13.3 |
| 8.0 |
| 10.6 |
|
Other operating (income) expense, net |
| — |
| — |
| 0.2 |
|
Operating loss |
| (5.1 | ) | (2.9 | ) | (1.6 | ) |
Interest expense, net |
| (15.4 | ) | (9.5 | ) | (8.9 | ) |
Loss before cumulative effect of a change in accounting for slotting fees and goodwill and before preferred dividends |
| (20.5 | ) | (12.4 | ) | (10.5 | ) |
Cumulative effect of a change in accounting for slotting fees |
| — |
| (2.4 | ) | — |
|
Cumulative effect of a change in accounting for goodwill |
| — |
| — |
| (0.8 | ) |
Net loss |
| (20.5 | ) | (14.8 | ) | (11.3 | ) |
Preferred dividends |
| (9.8 | ) | (10.0 | ) | (10.5 | ) |
Net loss applicable to common shareholders |
| (30.3 | )% | (24.8 | )% | (21.8 | )% |
Net Sales
The $2.5 million, or 5.2% decrease in net sales in fiscal 2005 compared to fiscal 2004 was the result of a reduction in sales of our veggie burger products and our meat alternative products introduced prior to fiscal 2004, partially offset by the introduction of our Gardenburger Wraps, which contributed $1.7 million to our net sales in fiscal 2005, and $3.7 million of sales related to our Gardenburger Meals in fiscal 2005 compared to $2.3 million in fiscal 2004 and a reduction in trade spending.
Net sales to Costco decreased by $372,000, or 8.9%, in fiscal 2005 compared to fiscal 2004. Effective the second quarter of fiscal 2004, Costco removed the Kirkland Signature co-branding label from our Gardenburger original packaging, which meant that our product was no longer required to be carried by all Costco stores. After numerous regional presentations, we have been able to partially offset the negative effects of this action and, as of September 30, 2005, approximately 32% of the Costco stores continue to carry our Gardenburger product.
The $0.9 million, or 1.8%, decrease in net sales in fiscal 2004 compared to fiscal 2003 was a result of an 8.7% decrease in sales of our veggie burger products, a decrease in sales to Costco and an increase in trade spending, offset in part by continuing growth in meat alternative products. Sales of products launched after the end of fiscal 2003, which are all meat alternative products, contributed $5.2 million to our net sales in fiscal 2004.
Net sales to Costco decreased by $3.2 million, or 41%, in fiscal 2004 compared to fiscal 2003 as a result of Costco’s decision to remove the Kirkland Signature co-branding label from our Gardenburger original packaging.
Trade spending totaled $9.0 million in fiscal 2005, $12.1 million in fiscal 2004 and $11.8 million in fiscal 2003. Trade spending includes promotions, discounts, contract origination fees and slotting fees. Pursuant to EITF No. 01-9 “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products,” these costs are recorded at the later of when revenue is recognized or when the sales incentive is offered and are generally classified as a reduction of sales.
Gross Margin
The $0.3 million, or 2.1%, decrease in gross margin in fiscal 2005 compared to fiscal 2004 was primarily due to the decreased sales, partially offset by an increase in gross margin as a percentage of net sales. The increase in gross margin as a percentage of net sales in fiscal 2005 compared to fiscal 2004 was primarily due to reduced costs at our manufacturing facility and improved overhead absorption, partially offset by the impact of lower production volume as we reduced our inventory
27
levels, primarily in the second quarter of fiscal 2005, therefore lowering the base over which to spread fixed costs. There were no material changes to raw material costs or selling prices in fiscal 2005 compared to fiscal 2004 and, at the current time, we do not anticipate any material selling price changes in fiscal 2006.
The $2.4 million, or 13.0%, decrease in gross margin and the decrease in gross margin as a percentage of net sales in fiscal 2004 compared to fiscal 2003 were due to decreased veggie burger sales, which have lower production costs than our other products, unfavorable manufacturing variances, which primarily resulted from inefficiencies related to the introduction of our new entrees in the third quarter of fiscal 2004, and higher trade spending. Except for an increase in certain commodity prices, primarily cheese, and certain shipping materials, we did not experience material changes to our raw material costs in fiscal 2004 compared to fiscal 2003. We also did not make any material selling price changes in fiscal 2004 compared to fiscal 2003.
Sales and Marketing Expense
The $1.6 million, or 11.8%, decrease in sales and marketing expense in fiscal 2005 compared to fiscal 2004 was primarily due to reductions in spending on marketing programs and planned reductions in travel and other non-essential expenditures as we focused on improving our cash flow and liquidity position. In addition, sales and marketing expense in fiscal 2004 includes approximately $57,000 of costs related to our move to Irvine, California from Portland, Oregon with no comparable costs in fiscal 2005. These factors were partially offset by a $399,000 increase in severance and related costs.
Sales and marketing expense in fiscal 2004 included approximately $57,000 of costs related to our move to Irvine, California from Portland, Oregon compared to $150,000 of such costs in fiscal 2003. The remaining decrease in sales and marketing expense in fiscal 2004 compared to fiscal 2003 was primarily due to the following:
• a $282,000 decrease in in-store product demonstration expense in the club store channel;
• a $236,000 decrease in coupon design, production and insertion costs attributable to one fewer coupon drop;
• a $173,000 decrease in severance pay;
• a $136,000 decrease in inventory storage costs achieved through better inventory management;
• a $117,000 decrease in sales commission and broker incentives expense due to negotiating lower commission rates for some brokers and restricting some incentive programs;
• a $99,000 decrease in product contributions; and
• a $95,000 decrease in advertising agency fees by eliminating the use of an advertising agency for the retail sales channel.
These decreases were partially offset by the following:
• a $111,000 increase in travel expense;
• a $190,000 increase in sales bonuses; and
• a $218,000 increase in freight delivery costs.
General and Administrative Expense
The $2.2 million, or 56.6%, increase in general and administrative expense in fiscal 2005 compared to fiscal 2004 was primarily due to the following:
• a $261,000 increase in consulting costs related to Sarbanes-Oxley compliance;
• a $263,000 increase in audit costs;
• an $899,000 accrual for the new management retention program; and
• a $991,000 increase in legal and other professional costs, primarily in connection with the identification of strategic alternatives, including our filing for Chapter 11 bankruptcy protection in October 2005.
28
These increases were offset by $587,000 of costs in the fiscal 2004 period related to our move to Irvine, California from Portland, Oregon and a $190,000 decrease in depreciation.
The decrease in general and administrative expense in fiscal 2004 compared to fiscal 2003 was primarily due to the following:
• a $688,000 decrease in costs incurred for outside services and legal fees;
• a $100,000 decrease in bad debt expense;
• a $364,000 decrease in depreciation expense due primarily to the elimination of depreciation related to our computer system, which has reached the end of its depreciable life; and
• a $70,000 reduction in rent expense due to our move to smaller quarters in Irvine, California.
Other Operating Income (Expense)
Other operating income in fiscal 2005 and fiscal 2004 primarily represents a gain on the sale of other assets.
Other operating expense of $105,000 in fiscal 2003 represents losses on the disposal of fixed assets.
Interest Expense
As discussed above, as a result of CapitalSource and Annex having the ability to call our debt at any point in time, all remaining exit fees were accrued and all deferred financing fees were written off during the quarter ended June 30, 2005. The accrual of the remaining exit fees at June 30, 2005 resulted in an increase to interest expense in fiscal 2005 of $1.4 million and the write-off of all remaining deferred financing fees resulted in an increase to interest expense in fiscal 2005 of $222,000. We also recorded the 20% exit premium on interest accrued on the Convertible Note subsequent to June 30, 2005, which totaled $160,000 in the fourth quarter of 2005. In connection with our Chapter 11 Case discussed above, we ceased the accrual of all interest and exit fees related to our Convertible Note effective October 14, 2005.
In connection with our debt amendments in February 2005, interest on outstanding advances under the revolving notes from February 18, 2005 to May 31, 2005 was at an annual rate of prime rate plus 4.50%. After May 31, 2005, the interest rate reverted back to the annual rate of prime rate plus 2.50%. In addition, as of February 18, 2005, interest on all outstanding amounts under the Convertible Note accrued at the rate of 15% per annum instead of 13% per annum.
Interest expense in fiscal 2005 also includes $110,000 and $250,000 for the amendment fees paid to CapitalSource and Annex, respectively, related to the February 2005 amendments, as well as $204,000 of legal and other expenses related to the amendments. The amendment fees and related legal and other expenses were primarily expensed in the second quarter of fiscal 2005 since they were related to the waivers of our non-compliance with certain financial covenants.
Income Taxes
A valuation allowance has been recorded for the full amount of deferred tax assets due to the uncertainty regarding the realization of the net deferred tax assets consisting primarily of net operating loss and credit carryforwards. Accordingly, no benefit has been recorded related to our losses in fiscal 2005, 2004 or 2003.
Cumulative Effect of Change in Accounting for Slotting Fees
Slotting fees refer to oral arrangements pursuant to which the retail grocer allows our products to be placed on the store’s shelves in exchange for a slotting fee. As reported in previous filings, slotting fees were initially recorded as a prepaid asset and the related expense was recognized ratably over a 12-month period beginning two months following product shipment as an offset to sales. Typically, twelve months is the estimated minimum period during which a retailer agrees to allocate shelf space. However, given that there are no written contractual commitments requiring the retail grocers to allocate shelf space for twelve months, in fiscal 2004, we determined that it was a preferable accounting method to expense the slotting fees as a reduction of sales in determining net sales in the period the related revenue is recognized for the first shipment of the related product. In accordance
29
with Accounting Principles Board Opinion (“APB”) 20, “Accounting Changes,” the cumulative effect of the change in accounting for slotting fees was reflected in the first quarter of fiscal 2004.
Cumulative Effect of Change in Accounting for Goodwill
In accordance with the adoption provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” in the first quarter of fiscal 2003, we tested the carrying value of our goodwill utilizing a discounted cash flow analysis and determined that the remaining balance of $411,000 should be written off. There was no goodwill on our balance sheet at September 30, 2005 or 2004.
Preferred Dividends and Accretion
Detail of our preferred dividends and accretion is as follows (in thousands):
|
| Year Ended September 30, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
12% cumulative dividends |
| $ | 3,900 |
| $ | 3,900 |
| $ | 3,900 |
|
Accretion of 10% redemption premium |
| 481 |
| 769 |
| 1,022 |
| |||
Accretion of original issue discount |
| 120 |
| 170 |
| 255 |
| |||
|
| $ | 4,501 |
| $ | 4,839 |
| $ | 5,177 |
|
The decreases in accretion from fiscal 2003 to fiscal 2005 were due to extensions of the earliest redemption date for the preferred stock, which extended the time over which the redemption premium and original discount were accreted.
As discussed above, pursuant to our Plan, all shares of preferred stock will be canceled with no compensation to the holders thereof. Accordingly, we eliminated the accrual of dividends and the accretion of the redemption premium and the original issue discount as of October 14, 2005, the date we filed our Chapter 11 Case.
Inflation
We believe that the impact of inflation was not material for fiscal years 2005, 2004 and 2003.
Liquidity and Capital Resources
Fiscal 2005 Cash Flow Initiatives
During the fourth quarter of fiscal 2004, we experienced sales declines due to one of our major competitors initiating a program of price discounting at unprecedented levels. These sales declines resulted in operating performance that was lower than our plans. When combined with the significant cash outlays for capital expenditures, slotting fees and other product introduction costs associated with the launch of our new microwavable meals, these events caused a higher than expected use of our short-term note payable.
To improve our cash flow and liquidity, the following actions were taken in fiscal 2005:
• A reduction of approximately $2.0 million in finished goods inventories which were built up over the 2002-2004 timeframe;
• A reduction in slotting fees from approximately $3.1 million in fiscal 2004 to approximately $0.4 million in fiscal 2005;
• A reduction in capital expenditures from approximately $1.4 million in fiscal 2004 to approximately $268,000 in fiscal 2005;
• The completion, on October 1, 2004, of a reduction in workforce at our manufacturing facility;
• A ban on non-essential travel and other administrative costs;
• The negotiation of extended payment terms with several of our major vendors; and
• The institution of additional cash management and tracking procedures.
As a result of the various initiatives, during fiscal 2005, we were able to make scheduled principal payments of $2.0 million on our long-term debt, pay the $650,000 exit fee to CapitalSource and fund all interest payments on our CapitalSource debt, which totaled approximately $1.0 million, with only a $453,000 increase in our short-term note payable. Net cash provided by operating activities in fiscal
30
2005 was $2.5 million, a $3.1 million improvement from the $0.6 million used for operating activities in fiscal 2004.
See “Debtor-in-Possession Credit Facilities” for a discussion of our current DIP Financing and the ultimate conversion to Exit Financing.
General
Accounts receivable increased $371,000 to $3.2 million at September 30, 2005 from $2.8 million at September 30, 2004, due to reductions in trade spending accruals, which are reported as an offset to accounts receivable. Days sales outstanding were approximately 24 days at September 30, 2005 compared to 22 days at September 30, 2004.
Inventories decreased $2.6 million to $6.4 million at September 30, 2005 compared to $9.0 million at September 30, 2004. This decrease was due to a planned reduction in finished goods inventories to improve cash flow and liquidity. Inventory turned approximately 4.7 times on an annualized basis in the fourth quarter of fiscal 2005 compared to approximately 3.9 times in the fourth quarter of fiscal 2004.
Accrued payroll and employee benefits increased $0.8 million to $1.3 million at September 30, 2005 compared to $0.5 million at September 30, 2004. The increase is primarily due to $899,000 of accrued retention pursuant to our executive officer retention agreements at September 30, 2005 compared to none at September 30, 2004.
Other current liabilities decreased $2.9 million to $0.6 million at September 30, 2005 compared to $3.6 million at September 30, 2004, due primarily to the transfer of $3.2 million of accrued interest at September 30, 2004 due on our Convertible Note to the Convertible Note balance.
Capital expenditures of $268,000 during fiscal 2005 were primarily used for manufacturing equipment. We anticipate spending no more than $250,000 on capital expenditures in fiscal 2006 primarily for manufacturing equipment.
Other long-term assets decreased $370,000 to $326,000 at September 30, 2005 compared to $696,000 at September 30, 2004 primarily due to the write-off of all remaining deferred financing fees during the third quarter of fiscal 2005 as a result of CapitalSource and Annex having the ability to call our debt at any point in time, as discussed above. The write-off of deferred financing fees, which is reflected as a component of interest expense, totaled $359,000 in fiscal 2005.
As of September 30, 2005, our Loan Agreement with CapitalSource provided for an $8.0 million term loan with a maturity of January 31, 2007 and a $7.0 million short-term note payable (together, “the Loans”). However, pursuant to our Plan as discussed above, the Loans were paid off and the Loan Agreement was terminated on November 22, 2005 utilizing our DIP Financing.
Our Convertible Note balance included the following (in thousands):
|
| September 30, |
| September 30, |
| ||
Principal |
| $ | 17,156 |
| $ | 16,906 |
|
Accrued Interest |
| 6,167 |
| — |
| ||
Exit Premium |
| 4,665 |
| 2,486 |
| ||
|
| $ | 27,988 |
| $ | 19,392 |
|
According to our Plan, the Convertible Note balance will be extinguished and Annex will be issued new equity interests in Gardenburger in full satisfaction of this claim. Accordingly, we ceased the accrual of all interest and exit fees related to our Convertible Note effective October 14, 2005.
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Contractual payments under our short-term note payable, our term loan, our Convertible Note, our operating leases and other obligations are significant. A schedule of contractual payments remaining due at September 30, 2005 in the next five fiscal years, including exit fees of approximately $4.7 million for the Convertible Note, is as follows (in thousands):
|
| Total |
| Fiscal |
| Fiscal |
| Thereafter |
| ||||
Short-Term Note Payable |
| $ | 5,244 |
| $ | 5,244 |
| $ | — |
| $ | — |
|
Term Loan |
| 2,861 |
| 2,861 |
| — |
| — |
| ||||
Convertible Note |
| 27,988 |
| 27,988 |
| — |
| — |
| ||||
Operating Leases |
| 1,431 |
| 1,269 |
| 162 |
| — |
| ||||
Purchase Order Obligations |
| 1,060 |
| 1,060 |
| — |
| — |
| ||||
License Agreement |
| 271 |
| 150 |
| 121 |
| — |
| ||||
Retention Agreements |
| 899 |
| 899 |
| — |
| — |
| ||||
Total |
| $ | 39,754 |
| $ | 39,471 |
| $ | 283 |
| $ | — |
|
As discussed above, our short-term note payable and our term loan were paid off on November 22, 2005 in accordance with the Plan. In addition, pursuant to the Plan, the Convertible Note will be terminated in exchange for new equity interests in Gardenburger.
As of September 30, 2005, we had 552,500 shares of Series C Convertible Preferred Stock and 97,500 shares of Series D Convertible Preferred Stock outstanding. The preferred stock balance consisted of the following (in thousands):
|
| September 30, |
| ||||
|
| 2005 |
| 2004 |
| ||
Original face amount |
| $ | 32,500 |
| $ | 32,500 |
|
Accrued dividends |
| 25,188 |
| 21,288 |
| ||
10% redemption premium |
| 3,012 |
| 2,531 |
| ||
Original issue discount |
| (348 | ) | (468 | ) | ||
|
| $ | 60,352 |
| $ | 55,851 |
|
As discussed above, pursuant to our Plan, all shares of preferred stock will be canceled with no compensation to the holders thereof. Accordingly, we eliminated the accrual of dividends and the accretion of the redemption premium and the original issue discount as of October 14, 2005, the date we filed our Chapter 11 Case.
Seasonality
The third and fourth quarters of our fiscal year typically have stronger sales due to the summer grilling season. We typically build inventories during the first and second quarters of each fiscal year in anticipation of increased sales in the third and fourth fiscal quarters, although in fiscal 2005, we have reduced inventory levels that had built up over the 2002 to 2004 time period in order to improve cash flow and liquidity.
Critical Accounting Policies and Estimates
Revenue Recognition and Trade Spending
In accordance with Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”), revenues are recognized upon passage of title to the customer, typically upon product pick-up, shipment or delivery to customers.
Our revenue arrangements with our customers often include sales incentives and other promotional costs such as coupons, volume-based discounts, slotting fees and off-invoice discounts. These costs are typically referred to collectively as “trade spending.” Pursuant to EITF No. 00-14, EITF No. 00-25 and EITF No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products),” these costs are recorded when revenue is recognized and are generally classified as a reduction of revenue. We do not provide for sales returns since, historically, sales returns have not been significant.
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We are required to make estimates regarding the level of coupon redemption, the amount of product to be purchased by certain customers over certain time periods and related volume-based and off-invoice discounts, and slotting fees based on product shipments in order to estimate our overall trade spending. These estimates are reviewed and recorded on a monthly basis based on information provided by our regional sales managers as to the types of arrangements that have been made with our customers, historical results and current period activity, and are recorded in our financial statements as an offset to sales and trade receivables. Trade spending totaled $9.0 million in fiscal 2005, $12.1 million in fiscal 2004 and $11.8 million in fiscal 2003. If our estimates are not reflective of actual results, we may be required to record adjustments that could materially affect our results of operations and financial condition for any given period.
Slotting Fees
Slotting fees are a type of trade spending and refer to oral arrangements pursuant to which the retail grocer allows our products to be placed on the store’s shelves in exchange for a slotting fee. Typically, 12 months is the estimated minimum period during which a retailer agrees to allocate shelf space. However, given that there are no written contractual commitments requiring the retail grocers to allocate shelf space for twelve months, we expense the slotting fees as a reduction of sales in determining net sales in the period the related revenue is recognized for the first shipment of the related product. The level of slotting fees varies based on the number of new product introductions, potential product reintroductions and in what sales channels products are introduced. Slotting fees, which are included as a component of total trade spending, totaled $0.4 million in fiscal 2005, $3.1 million in fiscal 2004 and $2.2 million (pro forma) in fiscal 2003. Prior to fiscal 2004, we capitalized and amortized slotting fees over a 12-month period and, accordingly, the fiscal 2003 amount is pro forma assuming it was computed based on our current accounting policy.
Inventory Valuation Allowance
We regularly evaluate the realizability of our inventory based on a combination of factors including the following: historical usage rates, forecasted sales or usage, historical spoilage rates and other factors. Raw materials are reviewed periodically by our operating personnel for spoilage. Finished goods are reviewed periodically by operating personnel to determine if inventory carrying costs exceed market selling prices. If circumstances related to our inventories change, our estimates of the realizability of inventory could materially change. Write-offs of inventory totaled $251,000 in fiscal 2005, $276,000 in fiscal 2004 and $140,000 in fiscal 2003 and, as of September 30, 2005 and 2004, our inventory valuation allowance totaled $163,000 and $140,000, respectively. We have not experienced material losses related to our inventories in the past and believe that the current level of valuation allowance is adequate.
Accounts Receivable and Allowances for Uncollectible Accounts
Credit limits are established through a process of reviewing the financial history and stability of each customer. We regularly evaluate the collectibility of our trade receivable balances by monitoring past due balances. If it is determined that a customer will be unable to meet its financial obligation, we record a specific reserve for bad debts to reduce the related receivable to the amount we expect to recover. If circumstances related to specific customers deteriorate, our estimates of the recoverability of receivables associated with those customers could materially change. We recorded $4,000 in bad debt write-offs in fiscal 2005, $3,000 in fiscal 2004 and $7,000 in fiscal 2003 and, as of September 30, 2005 and 2004, our allowance for bad debts totaled $100,000 and $104,000, respectively. Historically, bad debts have not had a material effect on our results of operations or financial condition, and we believe our allowance for doubtful accounts is adequate.
33
New Accounting Pronouncements
SFAS No. 154
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections: a replacement of APB Opinion No. 20 and FASB Statement No. 3,” which requires companies to apply most voluntary accounting changes retrospectively to prior financial statements. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Any future voluntary accounting changes made by us will be accounted for under SFAS No. 154.
SFAS No. 153
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets.” SFAS No. 153 amends APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” by replacing the exception for exchanges of similar productive assets with an exception for exchanges that do not have commercial substance. A transaction has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. We adopted SFAS No. 153 on July 1, 2005. SFAS No. 153 did not have any effect on our financial position, results of operations or cash flow.
SFAS No. 151
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs: an amendment of ARB No. 43, Chapter 4,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe the provisions of SFAS No. 151, when applied, will have a material impact on our financial position or results of operations.
SFAS No. 123R
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment: an amendment of FASB Statements No. 123 and 95,” which requires companies to recognize in their income statement the grant-date fair value of stock options and other equity-based compensation issued to employees. SFAS No. 123R is effective for annual periods beginning after June 15, 2005. Accordingly, we will adopt SFAS No. 123R in the first quarter of fiscal 2006. Unamortized stock-based compensation expense, on a pro forma basis, as of September 30, 2005 totaled $190,000, with $144,000 to be amortized in fiscal 2006 and $46,000 to be amortized in fiscal 2007.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Amounts outstanding under our Loan Agreement bear interest at rates tied to the prime rate with a minimum rate of 10% on the term loan and 8% on the short-term note payable. At September 30, 2005, we had $2.9 million outstanding at an interest rate of 11.25% on the term loan and $5.2 million outstanding at an interest rate of 8.25% on the short-term note payable. A hypothetical 10% increase in the prime rate would increase the interest rates currently being charged under the Loan Agreement to 11.925% for the term loan and 8.925% for the short-term note payable. Based on amounts outstanding under the Loan Agreement at September 30, 2005, a 10% increase in the prime rate would increase our annual interest expense by approximately $55,000 compared to the interest rates in effect at September 30, 2005.
Our Convertible Note is at a fixed interest rate and, therefore, a change in market interest rates would not affect interest expense related to the Convertible Note.
We do not currently utilize, nor do we anticipate utilizing, derivative financial instruments.
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Item 8. Financial Statements and Supplementary Data
The financial statements and notes thereto required by this item begin on page F-1 as listed in Item 15 of Part IV of this document. Unaudited quarterly financial data for each of the eight quarters in the period ended September 30, 2005 is as follows:
In thousands, except per share data |
| 1st Quarter |
| 2nd Quarter |
| 3rd Quarter |
| 4th Quarter |
| ||||
2005 |
|
|
|
|
|
|
|
|
| ||||
Net sales |
| $ | 9,128 |
| $ | 12,083 |
| $ | 12,602 |
| $ | 12,242 |
|
Gross margin |
| 3,501 |
| 3,314 |
| 4,494 |
| 4,651 |
| ||||
Net loss applicable to common shareholders |
| (3,172 | ) | (4,041 | ) | (3,934 | ) | (2,806 | ) | ||||
Basic and diluted net loss per share applicable to common shareholders (1) |
| (0.35 | ) | (0.45 | ) | (0.44 | ) | (0.31 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
2004 |
|
|
|
|
|
|
|
|
| ||||
Net sales |
| $ | 10,770 |
| $ | 12,914 |
| $ | 14,109 |
| $ | 10,787 |
|
Gross margin |
| 4,206 |
| 4,792 |
| 5,177 |
| 2,132 |
| ||||
Net loss applicable to common shareholders |
| (4,165 | ) | (2,189 | ) | (1,172 | ) | (4,500 | ) | ||||
Basic and diluted net loss per share applicable to common shareholders (1) |
| (0.46 | ) | (0.24 | ) | (0.13 | ) | (0.50 | ) |
(1) Per share amounts may not add due to rounding.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Effective June 25, 2004, based on a recommendation of the Audit Committee of our Board of Directors, we dismissed our independent public accountants, KPMG LLP. KPMG LLP’s report on our financial statements for the fiscal year ended September 30, 2003 did not contain an adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the fiscal year ended September 30, 2003 and during the subsequent interim period through the date of dismissal, June 25, 2004, there were not any disagreements between us and KPMG LLP on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, or any reportable events as defined under Item 304(a)(1)(v) of Regulation S-K promulgated by the Securities and Exchange Commission.
A copy of a letter addressed to the Securities and Exchange Commission from KPMG LLP stating that it agrees with the above statements is incorporated by reference into this Form 10-K as Exhibit 16.1.
Also effective June 25, 2004, based upon a recommendation of the Audit Committee of our Board of Directors, we engaged the firm of BDO Seidman, LLP to be our independent registered public accounting firm. We did not consult BDO Seidman, LLP prior to June 25, 2004 with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, or concerning any disagreement or reportable event with KPMG LLP.
Effective February 22, 2005, we dismissed our independent public accountants, BDO Seidman, LLP (“BDO”). Effective February 24, 2005, we engaged the firm of Haskell & White LLP (“Haskell”) to be our independent registered public accounting firm. The Audit Committee of our Board of Directors recommended that we change audit firms, directed the process of review of candidate firms to replace BDO and made the final decision to engage Haskell.
BDO’s report on our financial statements for the fiscal year ended September 30, 2004 contained an explanatory paragraph indicating that there was substantial doubt as our ability to continue as a going concern. Other than such statement, BDO’s report for the fiscal year ended September 30, 2004 did not contain an adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the fiscal year ended September 30, 2004 and during the subsequent interim period through the date of dismissal, February 22, 2005, there were not any disagreements between us and BDO on any matters of accounting principles or practices,
35
financial statement disclosure or auditing scope or procedure, or any reportable events as defined under Item 304(a)(1)(v) of Regulation S-K promulgated by the Securities and Exchange Commission.
During the course of their audit of our financial statements for the year ended September 30, 2004, BDO advised management and the Audit Committee of the Board of Directors that they had identified certain material weaknesses in internal control. The Audit Committee discussed corrective actions and future plans with BDO, and we are in the process of undertaking steps to remedy these material weaknesses. We authorized BDO to respond fully to the inquiries of Haskell concerning these material weaknesses.
A copy of a letter addressed to the Securities and Exchange Commission from BDO stating that it agrees with the above statements is incorporated by reference into this Form 10-K as Exhibit 16.2.
During our two most recent fiscal years and through February 24, 2005, we did not consult with Haskell on any matter (i) involving the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, in each case where a written report was provided or oral advice was provided that Haskell concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue or (ii) concerning any disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K, or a reportable event, as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
Item 9A. Controls and Procedures
During the course of their audit of our financial statements for the year ended September 30, 2004, our former independent registered public accounting firm, BDO, advised management and the Audit Committee of our Board of Directors that they had identified certain deficiencies in internal control over financial reporting. Certain of these deficiencies are considered to be “material weaknesses” as defined under the standards established by the Public Company Accounting Oversight Board. These “material weaknesses” relate to cash and cash disbursements and accounts payable cycles, inventory and revenue cycles and financial reporting. BDO also identified certain “significant deficiencies” that do not rise to the level of material weakness. These “significant deficiencies” involve matters relating to the design or operation of internal control that, in the judgment of BDO, could adversely affect the organization’s ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. These significant deficiencies relate to segregation of duties, lack of current accounting manual, maintenance of important documents, discrepancies between our fixed asset ledger and general ledger, discrepancies with our stated capitalization policy, human resource employee’s ability to enter employees, change salaries and issue checks, documentation of management’s review of journal entries and information technology policies and procedures.
We are currently in the process of undertaking steps to remedy these material weaknesses and significant deficiencies. In October 2004, we retained Singer Lewak Greenbaum and Goldstein, LLP (“SLGG”) as an independent third party to assist management in the preparation of our compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (“SOA 404”). SLGG assisted in the formation of a cross representational Steering Committee, whose charter includes the responsibility for SOA 404 compliance and remediation implementation. In November 2004, we hired a Manager of Business Systems and Analysis responsible for, among other things, providing support for Sarbanes-Oxley compliance. The individual assisted the Chief Financial Officer and Controller and provided additional segregation of duties consistent with our objectives. This individual resigned his position on July 29, 2005.
Management is diligently working to implement control enhancements to eliminate the combined BDO and Steering Committee findings and risk areas identified through documentation surveys, pending internal control test verification. Significant deficiencies are currently being corrected and remediated in efforts to meet SOA 404 compliance prior to fiscal year-end September 30, 2007. In our opinion, a
36
majority of the significant deficiencies communicated in our Form 10-K for the year ended September 30, 2004 and in our Form 10-Qs for the quarters ended December 31, 2004, March 31, 2005 and June 30, 2005 have been remediated (refer to Item 9A of the 2004 10-K and Item 4 of the 10-Qs). The internal control remediation efforts will help build a sound internal control structure and eliminate the observed significant deficiencies. Below is a listing of some of the issues that have been remediated and corrected, pending third party verification:
• Segregation of duties of Human Resources and Payroll Processing has occurred.
• New controls have been added and implemented for vendor selection and disbursement processing.
• Check processing and cash disbursement controls and safe keeping procedures have been enhanced including voucher packet organization.
• Deficiencies related to bank reconciliation controls have been remediated and controls strengthened.
• A new third party warehouse has been contracted and controls are being established.
• Slotting fees are being expensed as incurred.
• Inventory tag protocol, along with finished goods inventory reconciliations, has been improved and deficiencies have been remediated.
• IT password controls have been strengthened along with data back-up and storage procedures.
The following issues are currently under active management remediation and Steering Committee oversight:
• Segregation of duties through the Enterprise Resource Planning System is nearing completion.
• Standard accounting procedure documentation is nearing completion and pending review.
• IT governance, controls, policies and procedures are documented, pending final revision review.
We have discussed our corrective actions and future plans with our Audit Committee and independent registered public accountants and, as of the date of this Annual Report on Form 10-K, we believe the actions outlined above should correct the deficiencies in internal controls that are considered to be material weaknesses.
Other than the changes noted above, there has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Further, our management has evaluated, under the supervision and with the participation of our President and Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures provide reasonable assurance of effectiveness.
Pursuant to SOA 404, we will be required to furnish a report on management’s assessment of the effectiveness of our internal control over financial reporting as part of our Annual Report on Form 10-K for the fiscal year ending September 30, 2007. Our independent registered public accountants will then be required to attest to, and report on, our assessment. In order to issue our report, our management must document both the design of our internal control over financial reporting and the testing processes that support management’s evaluation and conclusion. Our management has begun the necessary processes and procedures for issuing its report on our internal control over financial reporting. However, we may face significant challenges in implementing the required processes and procedures. There can be no assurance that we will be able to complete the work
37
necessary for our management to issue its management report in a timely manner, or that management will be able to report that our internal control over financial reporting is effective.
The statements contained in Exhibit 31.1 and 31.2 should be considered in light of, and read together with, the information set forth in this Item 9A.
None.
Item 10. Directors and Executive Officers of the Registrant
Board of Directors
Name |
| Position |
| Age |
| Director Since |
|
Charles E. Bergeron (1), (2) |
| Director |
| 60 |
| 2003 |
|
Barry E. Krantz (1), (2), (3) |
| Director |
| 61 |
| 2004 |
|
Richard L. Mazer (1), (2) |
| Director |
| 60 |
| 1998 |
|
Scott C. Wallace (3) |
| President, Chief Executive Officer and Chairman of the Board |
| 50 |
| 2001 |
|
Paul F. Wenner (3) |
| Founder and Director |
| 58 |
| 1985 |
|
(1) Member of the Audit Committee.
(2) Member of the Executive Personnel and Compensation Committee.
(3) Member of the Nominating and Governance Committee.
Each of these individuals is presently serving on our Board of Directors. There are no family relationships among our executive officers and Directors.
Charles E. Bergeron has been Managing Director of Fuller Trident Group – Oregon, a regional investment banking firm, located in Portland, Oregon, since April 2003. He was Chief Financial Officer of Epitope, Inc. (predecessor to OraSure Techno logies, Inc.), a developer, manufacturer and marketer of oral specimen collection devices and medical diagnostic products, from January 1998 to December 2000 and Interim President from October 1999 to February 2000. He had previously served as Chief Financial Officer of Epitope Medical Products, a wholly-owned subsidiary of Epitope, Inc., from September 1997 to January 1998. Mr. Bergeron joined Epitope, Inc. in August 1993 as President and Chief Executive Officer of Agrimax Floral Products, Inc., then a wholly-owned subsidiary of Epitope, Inc. From 1978 to 1992, Mr. Bergeron was Senior Vice President, Finance of Freightliner Corporation, a Portland, Oregon, truck manufacturer. He holds a B.S. degree in management engineering and an M.S. degree in management science from Rensselaer Polytechnic Institute and an M.B.A. degree from Columbia University.
Barry E. Krantz has served as a Director of Gardenburger since July 2004. From August 1995 to present, Mr. Krantz has been self-employed serving on the Board of Directors of and/or consulting with several of the major restaurant chains in the United States and internationally. Mr. Krantz has spent more than 20 years in various executive positions within the foodservice industry. From January 1994 to August 1995, Mr. Krantz served as President and Chief Operating Officer of Family Restaurants, Inc., a $1.2 billion company that owned and operated the El Torito, Chi-Chi’s, Reuben’s, Charley Brown’s, Coco’s, Carrows and jojos chains. From March 1993 to January 1994, Mr. Krantz served as the Chief Operating Officer for Restaurant Enterprises Group, and served as President of its Family Restaurant Division from January 1989 to January 1994. From January 1979 to January 1988, Mr. Krantz was the Senior Vice President of Marketing and Concept Development for Denny’s Restaurants. Mr. Krantz received a B.A. degree from the University of Pennsylvania and an M.B.A. from the Stanford University Graduate School of Business. Before starting a career in the food service industry, Mr. Krantz held a variety of product management positions at General Foods Corporation
38
and senior account management positions at several major advertising agencies. Mr. Krantz is also on the Board of Directors of Red Tractor Cafe, Inc. and Fresh Choice, Inc.
Richard L. Mazer is the President and Chief Executive Officer of Ventura Foods, LLC, a food processor, where he has worked since December 1997. Mr. Mazer has been involved in the food industry for more than 20 years, including through his strategic and financial consulting company, The Mazer Group, from 1992 to 1997. Mr. Mazer received B.S. degrees in Economics and Management from Massachusetts Institute of Technology.
Scott C. Wallace joined Gardenburger as President and Chief Executive Officer on January 15, 2001. Mr. Wallace also became Chairman of the Board in May 2002. Prior to joining Gardenburger, Mr. Wallace served in various positions at Mauna Loa Macadamia Nut Corporation (“Mauna Loa”) since 1994, including President and Chief Executive Officer beginning in 1999, President and Chief Operating Officer from 1998 to 1999, and as President – North America Division prior to that. Before accepting a position at Mauna Loa, Mr. Wallace held a management position at E.J. Brach Corporation, a candy producer, for six years, and sales positions at Eastman Kodak Company, a manufacturer of camera equipment, and Procter and Gamble, a consumer products company. Mr. Wallace received a B.S. in Economics from San Francisco State University.
Paul F. Wenner founded Gardenburger in 1985 as a sole proprietorship and acted as its Vice President from the date of its incorporation until December 1989, when he became President, Chief Executive Officer and Chairman of the Board. From 1994 to May 2004, Mr. Wenner was our Chief Creative Officer, providing advice regarding new product development and assisting with marketing efforts. Mr. Wenner relinquished his duties as President in 1994 and as Chairman of the Board in 1995 and as Chief Creative Officer in 2004. From 1980 through 1984, he owned and operated the Garden House Restaurant and Gourmet Cooking School, where he developed the Gardenburger® veggie patty. The school was affiliated with Mt. Hood Community College’s evening educational curriculum. Mr. Wenner received two Associate of Arts degrees from Mt. Hood Community College.
The following table identifies our current executive officers, the positions they hold, and the year in which they began serving in their respective capacities. Our executive officers are elected by the Board of Directors annually to hold office until their successors are elected and qualified.
Executive Officers
Name |
| Age |
| Current Position(s) with Company |
| Officer Since |
|
Scott C. Wallace |
| 50 |
| Chief Executive Officer, President and Chairman of the Board |
| 2001 |
|
James W. Linford |
| 58 |
| Senior Vice President and Chief Operating Officer |
| 1997 |
|
Robert T. Trebing, Jr. |
| 55 |
| Chief Financial Officer, Treasurer and Secretary |
| 2003 |
|
For biographical information for Scott C. Wallace, see “Board of Directors” above.
James W. Linford joined Gardenburger in March 1997 as Vice President of Supply Chain, responsible for our manufacturing operations and logistics. Upon the resignation of our Chief Executive Officer in August 2000 and until Mr. Wallace joined Gardenburger in January 2001, Mr. Linford served as Interim President and Chief Executive Officer. In January 2001, Mr. Linford was named Senior Vice President and Chief Operating Officer. He was Vice President and General Manager of CH2M Hill Food Group from 1995 to 1997, Director of Manufacturing for Ocean Spray Cranberries from 1993 to 1995 and General Manager of Operations for Ore-Ida Foods, a division of the Heinz Company, from 1987 to 1993.
39
Robert T. Trebing, Jr. joined Gardenburger in November 2003 as Senior Vice President and Chief Financial Officer. Effective August 26, 2005, Mr. Trebing was no longer an employee of Gardenburger, but was engaged on a consulting basis to serve as Gardenburger’s Chief Financial Officer, Treasurer and Secretary. Prior to joining Gardenburger, Mr. Trebing served as Executive Vice President and Chief Financial Officer of Prandium, Inc., a company engaged in the operation of restaurants in the full-service and fast-casual segments, since April 1997. From December 2002 to February 2003, Mr. Trebing also served as the Acting President and Chief Executive Officer of Prandium, Inc. He also served as President of Chi-Chi’s, Inc., Koo Koo Roo, Inc. and The Hamlet Group, Inc., all restaurant chains and wholly-owned subsidiaries of Prandium, Inc., since December 30, 2002. Mr. Trebing served in various other positions at Prandium, Inc., since its founding in 1986. Mr. Trebing received a B.A. from California State University at Fullerton and an M.B.A. from the University of Southern California.
Audit Committee
We have a standing Finance and Audit Committee (the “Audit Committee”), which, during fiscal 2005, was composed of Mr. Bergeron (Committee Chair), Mr. Coleman, who resigned effective March 14, 2005, and Mr. Mazer. In addition, Mr. Krantz was added to the Audit Committee effective April 14, 2005.
Audit Committee Financial Expert
As required by the Sarbanes-Oxley Act of 2002, our Board of Directors has determined that one member of our Audit Committee, Charles E. Bergeron, has the qualifications to be an “audit committee financial expert” as defined in the SEC’s rules and regulations and also meets the standards of independence adopted by the SEC for membership on an audit committee.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our Directors and executive officers and persons who own more than 10% of the outstanding shares of our common stock (“10% shareholders”), to file with the SEC initial reports of beneficial ownership and reports of changes in beneficial ownership of shares of our common stock and other equity securities. To the best of our knowledge, based solely on review of the copies of such reports furnished to us or otherwise in our files and on written representations from our Directors and executive officers, our officers, Directors and 10% shareholders complied with all applicable Section 16(a) filing requirements during fiscal 2005.
Code of Ethics
We adopted a Code of Ethics that applies to all of our employees, including our principal executive officer and our principal financial and accounting officer. We have filed a copy of our Code of Ethics as Exhibit 14 to our Annual Report on Form 10-K for our fiscal year ended September 30, 2003. We will provide, free of charge to any person, a copy of our Code of Ethics. Requests should be sent to: Secretary, Gardenburger, Inc., 15615 Alton Parkway, Suite 350, Irvine, California 92618.
40
Item 11. Executive Compensation
Director Compensation
Directors receive an $8,000 annual retainer for their service on the Board. In addition, committee chairs are paid an additional $12,000 per year and all committee members are paid $2,000 for each committee meeting attended. During fiscal 2005, five non-employee Directors, Messrs. Bergeron, Coleman, Krantz, Mazer and Wenner, received fees for their participation on our Board of Directors and Committees as follows:
Name |
| Fees Received |
| |
Charles E. Bergeron |
| $ | 76,000 |
|
Alexander P. Coleman |
| 16,000 |
| |
Barry E. Krantz |
| 44,000 |
| |
Richard L. Mazer |
| 42,000 |
| |
Paul F. Wenner |
| 20,000 |
| |
No other directors received compensation for their participation on the Board of Directors. All non-employee Directors are reimbursed for their expenses incurred in attending meetings of the Board of Directors. Mr. Coleman ceased to be a Director effective March 14, 2005.
We also have a licensing agreement with Mr. Wenner, which expires in May 2009. Pursuant to the agreement, Mr. Wenner grants to us an exclusive, royalty-free, worldwide license to make use of, copy, reproduce, modify, adapt, distribute, transmit, broadcast, display, exhibit, project and otherwise exploit certain of Mr. Wenner’s property. In exchange, we pay Mr. Wenner $75,000 per annum. The agreement also provides that, during the term of the agreement, Mr. Wenner shall make, at dates and times reasonably agreed to by each of Mr. Wenner and us, certain personal appearances for which Mr. Wenner shall be compensated at the rate of $500 per day, plus all reasonable and necessary expenses (including coach air travel, hotel accommodations and meal expenses) incurred by Mr. Wenner in connection with such personal appearances. Mr. Wenner received approximately $79,000 pursuant to this agreement in fiscal 2005.
Compensation Committee Interlocks and Insider Participation
During fiscal 2005, Directors who served on the Compensation Committee included Messrs. Bergeron, Coleman, who resigned effective March 14, 2005, Krantz and Mazer. None of these individuals is, or has been in the past, an officer or employee of Gardenburger.
41
Executive Officer Compensation
Summary Compensation Table
The following table provides information for the fiscal years indicated concerning compensation earned by our Chief Executive Officer and our other executive officers whose salary and bonus during fiscal 2005 exceeded $100,000 (collectively referred to as the “named executive officers”).
|
|
|
|
|
|
|
| Long-Term |
|
|
| |||
|
|
|
|
|
|
|
| Compensation |
|
|
| |||
|
|
|
|
|
|
|
| Awards |
|
|
| |||
|
|
|
|
|
|
|
| Securities |
|
|
| |||
|
| Fiscal |
| Annual Compensation |
| Underlying |
| All Other |
| |||||
Name and Principal Position |
| Year |
| Salary (1) |
| Bonus |
| Options (#) |
| Compensation (2) |
| |||
Scott C. Wallace |
| 2005 |
| $ | 286,000 |
| $ | — |
| — |
| $ | 6,075 |
|
Chief Executive Officer, |
| 2004 |
| 283,800 |
| 68,640 |
| — |
| 6,964 |
| |||
President and Chairman of the |
| 2003 |
| 270,092 |
| — |
| — |
| 5,858 |
| |||
Board |
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
James W. Linford |
| 2005 |
| 211,000 |
| — |
| — |
| 4,151 |
| |||
Senior Vice President and |
| 2004 |
| 209,423 |
| 45,630 |
| — |
| 5,519 |
| |||
Chief Operating Officer |
| 2003 |
| 199,500 |
| — |
| — |
| 4,745 |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
Robert T. Trebing, Jr. (3) |
| 2005 |
| 188,308 |
| — |
| — |
| 258,789 |
| |||
Former Senior Vice President |
| 2004 |
| 203,231 |
| 40,000 |
| — |
| 6,550 |
| |||
and Chief Financial Officer |
| 2003 |
| — |
| — |
| — |
| — |
| |||
(1) Amounts shown include cash compensation earned in each respective year, including amounts deferred at the election of the named executive officer pursuant to our 401(k) Plan.
(2) Amounts included in this column for fiscal 2005 are as follows:
Name |
| 401(k) |
| Life |
| Payout of |
| Severance |
| Consulting |
| |||||
Mr. Wallace |
| $ | 4,400 |
| $ | 1,675 |
| $ | — |
| $ | — |
| $ | — |
|
Mr. Linford |
| 3,246 |
| 905 |
| — |
| — |
| — |
| |||||
Mr. Trebing |
| 2,977 |
| 1,685 |
| 7,627 |
| 204,000 |
| 42,500 |
| |||||
(3) Mr. Trebing’s employment with Gardenburger began in November 2003 and was terminated in August 2005. In connection with his termination in August 2005, we entered into a consulting agreement with Mr. Trebing whereby he performs the duties of our Chief Financial Officer, Treasurer and Secretary and acts as our Chief Accounting Officer.
Stock Options Granted
There were no stock options granted to the named executive officers during fiscal 2005.
Option Exercises and Holdings
The following table provides information concerning unexercised options held at September 30, 2005 with respect to the named executive officers. No named executive officers exercised any options during fiscal 2005.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
|
| Number of |
| Value of Unexercised |
| ||||||
Name |
| Exercisable |
| Unexercisable |
| Exercisable |
| Unexercisable |
| ||
Scott C. Wallace |
| 150,000 |
| — |
| $ | — |
| $ | — |
|
James W. Linford |
| 227,420 |
| 20,000 |
| — |
| — |
| ||
Robert T. Trebing, Jr. |
| — |
| — |
| — |
| — |
| ||
(1) Based on the market price of the underlying securities at September 30, 2005, $0.05 per share.
42
Employment, Severance and Change in Control Arrangements
Scott C. Wallace
Gardenburger entered into an agreement with Scott C. Wallace dated February 24, 2004 and amended March 24, 2005 regarding the terms of his employment as President and Chief Executive Officer of Gardenburger. Pursuant to the agreement, Mr. Wallace’s base salary is currently $286,000 per year and is subject to annual review by the Compensation Committee and subject to adjustment by the Board of Directors in its sole discretion. Mr. Wallace is also entitled to participate in our 401(k) plan, stock incentive plan and health and welfare benefit programs made available to other officers and to four weeks’ paid vacation annually.
Mr. Wallace will be entitled to severance equal to one year’s base salary payable over 12 months and continuation of all health and welfare benefits for one year in the event of involuntary termination other than for cause or due to death or disability. As used in Mr. Wallace’s employment agreement, “cause” means (i) any fraud or dishonesty by Mr. Wallace involving Gardenburger, (ii) willful misconduct or gross negligence in connection with performance of his duties, (iii) his conviction for committing a felony, (iv) the commission by Mr. Wallace of any act in direct competition with or materially detrimental to the best interests of Gardenburger, or (v) willful and continued failure by Mr. Wallace to substantially perform his duties after delivery of a written demand specifying the duties which have not been substantially performed.
The agreement provides for a special bonus payable upon the completion of a sale of Gardenburger. The special bonus will be equal to one percent (1%) of the sale price up to $100 million and two percent (2%) of the portion, if any, of the sale price in excess of $100 million. Mr. Wallace has the right, in his sole discretion, to waive receipt of any portion of the special bonus if, and to the extent that, he determines that a reduction in the special bonus would give him an income tax benefit.
The agreement also provides that if Mr. Wallace’s employment is terminated for other than cause following a change in control, or if he terminates his employment for “good reason,” he shall be paid an amount equal to his annual base salary currently in effect, or, if higher, his annual base salary as in effect prior to any reduction within twelve months preceding termination, payable as a lump sum. He shall also receive continuation of all health and welfare benefits for a twelve-month period following termination.
“Good reason” means the undertaking of any of the following without Mr. Wallace’s consent: (i) relocation of his place of employment more than 25 miles from the location he is currently performing his duties; (ii) the reduction by more than 10% of his base compensation not related to a reduction in the salaries of all executive officers of Gardenburger; (iii) the significant change or reduction of his duties that results in any diminution or adverse change of his position, status or circumstances; or (iv) providing Mr. Wallace continues his employment with Gardenburger through the 90-day period following the change in control, any termination by Mr. Wallace of his position with Gardenburger or its successor that is effective on or within the 30 days following expiration of a 90-day period following the change in control for any reason or for no reason will constitute “good reason.” For this purpose, if Mr. Wallace is terminated by Gardenburger without cause before the change in control and such termination is in connection with the change in control, Mr. Wallace will be deemed to have continued his employment through the change in control date.
The agreement contains a three-year non-compete clause following termination.
James W. Linford
Gardenburger entered into an employment agreement with Mr. Linford dated February 26, 2004 and amended March 24, 2005. Pursuant to the agreement, Mr. Linford’s current base salary is $211,000 per year and is subject to annual review by the Compensation Committee and subject to adjustment by the Board of Directors in its sole discretion. Mr. Linford is also entitled to participate in our 401(k) plan, stock incentive plan and health and welfare benefit programs made available to other officers and to four weeks’ paid vacation annually.
43
Mr. Linford will be entitled to severance equal to one year’s base salary payable over 12 months and continuation of all health and welfare benefits for one year in the event of involuntary termination other than for cause (as defined above) or due to death or disability.
The agreement provides for a special bonus payable upon the completion of a sale of Gardenburger. The special bonus will be equal to one quarter of one percent (0.25%) of the sale price up to $100 million and one half of one percent (0.5%) of the portion, if any, of the sale price in excess of $100 million.
The agreement also provides that if Mr. Linford’s employment is terminated for other than cause following a change in control, or if he terminates his employment for “good reason,” (as defined above) he shall be paid an amount equal to his annual base salary currently in effect, or, if higher, his annual base salary as in effect prior to any reduction within twelve months preceding termination, payable as a lump sum. He shall also receive continuation of all health and welfare benefits for a twelve-month period following termination.
The agreement contains a three-year non-compete clause following termination.
Robert T. Trebing, Jr.
Gardenburger entered into a Separation Agreement dated August 26, 2005 and a Consulting Agreement dated August 26, 2005 with Mr. Trebing. Pursuant to his previously existing employment agreement, Mr. Trebing received $204,000, representing his annual base salary, upon the date of his termination and the signing of the Separation Agreement. Pursuant to his Consulting Agreement, Mr. Trebing received $25,500 upon signing of the agreement and receives $8,500 for his services every two week period thereafter. Pursuant to the Consulting Agreement, Mr. Trebing serves as the Chief Financial Officer of the Company, as well as the Principal Financial Officer. The Consulting Agreement remains in effect until the earlier of (i) the date of Gardenburger’s emergence from bankruptcy under the United States Bankruptcy Code or (ii) termination of the agreement by either party by giving the other party 30 days prior written notice.
Retention Agreements
We entered into Retention Agreements with each of Mr. Wallace, Mr. Linford and Mr. Trebing (together, the “Executives”) on January 27, 2005. On March 24, 2005, we entered into amendments to these Retention Agreements in order to, among other things, revise the definition of “Change in Control” and delete Section 4.3 “Bankruptcy Limitation” in each of the agreements. On each of May 4, 2005 and July 19, 2005, we entered into, respectively, an Amended and Restated Retention Agreement and a Second Amended and Restated Retention Agreement (the “Agreement”) with each of the Executives. The Agreement provides incentive for each of the Executives to continue to be employed by us through and following a Change in Control (as defined in the Agreement) or a Sale Transaction (as defined in the Agreement). The Agreement provides for payment of 100% of the retention bonus immediately following the date of a Change in Control. The Agreement also provides for payment of 75% of a retention bonus on the date of our execution of a Sale Transaction, with the remaining 25% of the retention bonus payable following the date of the consummation of the transactions contemplated by the Sale Transaction. If the signing of a Sale Transaction or Change in Control does not occur by January 27, 2007, the full 100% of the retention bonus is payable to the Executive. The Agreement also provides for payment of a retention bonus if the Executive’s employment by us is terminated without Cause (as defined in the Agreement) other than in connection with the Executive’s death or disability (as defined in the Agreement). These retention bonuses are subject to certain conditions set forth in the Agreement. Declaration by the Bankruptcy Court of the effectiveness of our Plan would be considered a Change in Control.
Vesting of Options
Certain options granted to the named executive officers contain provisions that such options will immediately become exercisable as to shares not previously vested upon (i) termination of employment as a result of the optionee’s death or disability or (ii) termination of employment without cause or for good reason following a change in control.
44
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth, as of November 30, 2005, certain information furnished to us with respect to beneficial ownership of our common stock and preferred stock by (i) each Director, (ii) the “named executive officers” (as defined under “Executive Compensation”), (iii) all persons known by us to be beneficial owners of 5% or more of our outstanding common stock or preferred stock, and (iv) all executive officers and Directors as a group. Unless otherwise indicated below, the address of each person listed below is 15615 Alton Parkway, Suite 350, Irvine, California 92618.
|
| Amount and Nature of Beneficial Ownership (1) |
| ||||||
Name and Address of Beneficial Owner |
| Shares of |
| Percentage |
| Shares of |
| Percentage |
|
Annex Capital Management LLC (3) |
| 2,311,473 |
| 20.4 | % | — |
| — |
|
|
|
|
|
|
|
|
|
|
|
Gruber & McBaine Capital Management LLC (4) |
| 832,607 |
| 9.1 | % | 15,000 |
| 2.3 | % |
|
|
|
|
|
|
|
|
|
|
Rosewood Capital III, L.P. (5) |
| 1,459,238 |
| 14.0 | % | 206,000 |
| 31.7 | % |
|
|
|
|
|
|
|
|
|
|
Paul F. Wenner |
| 1,344,180 |
| 13.5 | % | — |
| — |
|
|
|
|
|
|
|
|
|
|
|
Farallon Partners, L.L.C. (6) |
| 1,012,233 |
| 10.1 | % | 142,000 |
| 21.8 | % |
|
|
|
|
|
|
|
|
|
|
Farallon Capital Management, L.L.C. (6) |
| 370,552 |
| 4.0 | % | 52,000 |
| 8.0 | % |
|
|
|
|
|
|
|
|
|
|
MidOcean Capital Investors, L.P. (7) |
| 710,868 |
| 7.3 | % | 100,000 |
| 15.4 | % |
|
|
|
|
|
|
|
|
|
|
James W. Linford (8) |
| 295,416 |
| 3.2 | % | — |
| — |
|
|
|
|
|
|
|
|
|
|
|
Scott C. Wallace (9) |
| 156,922 |
| 1.7 | % | — |
| — |
|
|
|
|
|
|
|
|
|
|
|
Richard L. Mazer |
| 62,500 |
| * |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
Robert T. Trebing, Jr. |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
Charles E. Bergeron |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
Barry E. Krantz |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
All current executive officers and Directors as a group (7 persons) |
| 1,859,018 |
| 17.9 | % | — |
| — |
|
*Less than one percent
45
(1) Applicable percentage of ownership is based on 9,002,101 shares of common stock and 650,000 shares of preferred stock outstanding as of November 30, 2005. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (the “SEC”), and is based on voting and investment power with respect to shares. Shares of common stock subject to options, warrants or other convertible securities that are exercisable currently or within 60 days after November 30, 2005 are deemed outstanding for purposes of computing the percentage ownership of the person or group holding such options, warrants or convertible securities, but are not deemed outstanding for computing the percentage of any other person. Unless otherwise indicated, to the best of our knowledge, each of the persons named above has sole voting and investment power with respect to all shares shown as being beneficially owned by them.
(2) Includes shares of common stock subject to options exercisable within 60 days after November 30, 2005 as follows:
Name |
| Number of Options |
|
Mr. Wenner |
| 953,000 |
|
Mr. Linford |
| 227,420 |
|
Mr. Wallace |
| 150,000 |
|
Mr. Mazer |
| 50,500 |
|
|
|
|
|
All current executive officers and Directors as a group |
| 1,380,920 |
|
(3) Includes 1,753,492 shares of common stock that Annex has the right to acquire upon conversion of the Convertible Notes. The conversion price was $9.78 as of November 30, 2005. Also includes warrants to purchase 557,981 shares of our common stock.
(4) Gruber & McBaine Capital Management, LLC (“GMCM”), has shared voting and dispositive power with respect to 641,276 shares of common stock. Jon D. Gruber and J. Patterson McBaine are the managers of GMCM, an investment adviser, and Thomas O. Lloyd-Butler is a member of GMCM. Also includes 15,000 shares of preferred stock (convertible into 93,754 shares of common stock) which GMCM and its affiliates either own or with respect to which they have voting or dispositive power and warrants to purchase 12,877 shares of common stock issued to GMCM and its affiliates.
(5) Includes 1,287,552 shares of common stock issuable upon conversion of 206,000 shares of preferred stock and warrants to purchase 171,686 shares of common stock.
(6) Each of the entities affiliated with Farallon Partners, L.L.C. (“FPLLC”) and the accounts managed by Farallon Capital Management, L.L.C. (“FCMLLC”), a registered investment adviser (together such entities and accounts, “Farallon”), that acquired shares of preferred stock holds such securities directly in its own name. In addition, two of such entities own an aggregate of 3,700 shares of common stock. FPLLC, as the general partner of certain of such entities, and FCMLLC, pursuant to investment management agreements, each may, for purposes of Rule 13d-3 under the Securities Exchange Act of 1934 (the “Exchange Act”), be deemed to own beneficially the shares held by such entities and accounts, as well as the shares of common stock into which the shares of preferred stock are convertible. Each of FCMLLC and FPLLC, and each managing member thereof, disclaim any beneficial ownership of such shares. All of the above-mentioned entities and persons disclaim group attribution. The 142,000 and 52,000 shares of preferred stock owned by FPLLC and FCMLLC, respectively, are convertible into 887,536 and 325,013 shares of common stock, respectively. Also includes warrants to purchase 121,897 shares of common stock held by FPLLC and warrants for 44,639 shares of common stock held by FCMLLC. The following people have shared voting and dispositive power with respect to the Farallon shares as managing members of FPLLC and FCMLLC: Joseph F. Downes, Enrique H. Boilini, David I. Cohen, Chan R. Ding, William F. Duhamel, Charles E. Ellwein, Richard B. Fried, Monica R. Landry, William F. Mellin, Stephen L. Millham, Rajiv A. Patel, Derek Schrier, Thomas F. Steyer and Mark C. Wehrly.
(7) Includes 100,000 shares of preferred stock, which are currently convertible into 625,025 shares of common stock and warrants to purchase 85,843 shares of common stock held by MidOcean Capital Investors, L.P. Ultramar Capital, Ltd., MidOcean Capital Partners, L.P, Existing Fund GP, Ltd., MidOcean Partners, LP and MidOcean Associates, SPC may all be deemed to be beneficial owners of the shares as a result of their direct or indirect control relationship with MidOcean Capital Investors, L.P. MidOcean Capital Partners, L.P. is the general partner of MidOcean Capital Investors, L.P. Existing Fund GP, Ltd. Is the general partner of MidOcean Capital Partners, L.P. MidOcean Partners, LP is the sole owner of Existing Fund GP, Ltd. And MidOcean Associates, SPC is the general partner of MidOcean Partners, LP. J. Edward Virtue may be deemed the beneficial owner of the shares because he indirectly controls the securities, but disclaims beneficial ownership except to the extent of his pecuniary interest therein.
(8) Includes 56,996 shares held in Mr. Linford’s 401(k) Plan account.
(9) Includes 6,922 shares held in Mr. Wallace’s 401(k) Plan account.
46
The following table sets forth information, as of September 30, 2005, about shares of our common stock that may be issued upon the exercise of options granted under our equity compensation plans and arrangements, divided between plans approved by our shareholders and plans or arrangements not submitted to our shareholders for approval.
Plan Category |
| Number of |
| Weighted average |
| Number of securities |
| |
Equity compensation plans approved by shareholders |
| 1,141,920 |
| $ | 2.34 |
| 2,209,103 |
|
|
|
|
|
|
|
|
| |
Equity compensation plans not approved by shareholders |
| 2,103,462 | (1) | 0.78 |
| — |
| |
Total |
| 3,245,382 |
| $ | 1.33 |
| 2,209,103 |
|
(1) Includes 1,115,962 warrants exercisable for our common stock at $0.28 per share plus options granted pursuant to plans not approved by our shareholders. See Note 15 of Notes to Financial Statements under the heading “Non-Plan Options” for a description of the material terms of options granted without shareholder approval and not requiring shareholder approval, which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Certain Relationships and Related Transactions
Mr. Mazer is President and Chief Executive Officer of Ventura Foods, LLC. We purchased barbecue sauce from Ventura Foods totaling $273,000 in fiscal 2005. We believe that the price paid to Ventura Foods is fair in comparison with prices that would be paid to an independent third party for similar barbecue sauce. At September 30, 2005, we owed Ventura Foods, LLC $26,000 for the purchase of such barbecue sauce.
Mr. Coleman, a former Director who resigned from our Board of Directors effective March 14, 2005, is Managing Partner of Annex Capital Management LLC to which we are indebted in the principal amount of approximately $17.2 million plus $4.7 million of accrued but unpaid interest and $6.2 million of accrued but unpaid exit fees related to this debt. This debt currently bears interest at the annual rate of 15%.
We also have a licensing agreement with Mr. Wenner, which is described under the heading “Director Compensation” in Item 11. above.
47
Item 14. Principal Accountant Fees and Services
The following fees are anticipated to be paid to Haskell & White LLP related to fiscal 2005 and were paid to BDO Seidman, LLP related to fiscal 2004:
|
| 2005 |
| % |
| 2004 |
| % |
| ||
Audit Fees |
| $ | 96,000 |
| 100 | % | $ | 340,000 |
| 100 | % |
Audit Related Fees |
| — |
| — |
| — |
| — |
| ||
Tax Fees (1) |
| 24,550 |
| 100 | % | 580 |
| 100 | % | ||
All Other Fees (2) |
| 19,224 |
| 100 | % | 11,452 |
| 100 | % | ||
|
| $ | 139,774 |
|
|
| $ | 352,032 |
|
|
|
(1) Consists of corporate tax compliance assistance and other tax consulting, which is customarily provided by a company’s independent registered public accountant.
(2) Consists of fees for the audit of our employee benefit plan and assistance related to our reorganization and restructuring plan.
Pre-Approval Policies
Prior to retaining Haskell & White LLP to provide services, we discuss the services with the Chairman of the Audit Committee. The Chairman then reviews the request and, if the Chairman determines it necessary, he discusses the potential services with the other Audit Committee members. The decision is then communicated to the Board of Directors and, if approved, it is formally approved at the next Audit Committee meeting.
Item 15. Exhibits and Financial Statement Schedules
Financial Statements and Schedules
48
Exhibits
The exhibits filed as a part of this report are listed below and this list is intended to comprise the exhibit index:
Exhibit No. |
| Description |
3.1 |
| Restated Articles of Incorporation, as amended through March 23, 2004 (22) |
|
|
|
3.2 |
| 1995 Restated Bylaws, as amended July 13, 1999 (10) |
|
|
|
10.1 |
| Amended and Restated Rights Agreement between Gardenburger, Inc. and First Chicago Trust Company of New York, dated July 15, 1999 (10) |
|
|
|
10.2 |
| Amendment No. 1 dated as of January 2, 2002 to Rights Agreement dated as of July 15, 1999 between First Chicago Trust Company of New York and Gardenburger, Inc., dated effective as of January 2, 2002 (13) |
|
|
|
10.3 |
| Amendment No. 2 dated as of January 10, 2002 to the Amended and Restated Rights Agreement dated as of July 15, 1999, between Gardenburger, Inc. and EquiServe Trust Company, N.A. (successor to First Chicago Trust company of New York (13) |
|
|
|
10.4 |
| Amendment No. 3 dated as of April 29, 2002 to the Amended and Restated Rights Agreement dated as of July 15, 1999, between Gardenburger, Inc. and EquiServe Trust Company, N.A. (16) |
|
|
|
10.5 |
| Amendment No. 4 dated as of August 18, 2003 to the Amended and Restated Rights Agreement dated as of July 15, 1999, between Gardenburger, Inc. and EquiServe Trust Company, N.A. (19) |
|
|
|
10.6 |
| Office Space Lease by and between The Irvine Company and Gardenburger, Inc. dated August 21, 2003. (20) |
|
|
|
10.7 |
| Facility Lease by and between Freeport Center Associates, a Utah general partnership and Gardenburger, Inc., dated May 28, 1997. (2) |
|
|
|
10.8 |
| Addendum, dated August 1, 1997, to Facility Lease by and between Freeport Center Associates and Gardenburger, |
|
|
|
10.9 |
| Lease Extension, dated October 17, 2002, to Facility Lease dated May 28, 1997 by and between Freeport Center Associates and Gardenburger, Inc. (16) |
|
|
|
10.10 |
| Warehouse Lease between Freeport Center Associates and Gardenburger, Inc., dated January 25, 1999 (7) |
|
|
|
10.11 |
| Note Purchase Agreement, dated as of March 27, 1998, between Gardenburger, Inc. and Dresdner Kleinwort Benson Private Equity Partners L.P. (4) |
|
|
|
10.12 |
| First Amendment to Note Purchase Agreement, dated December 30, 1999, between Gardenburger, Inc. and Dresdner Kleinwort Benson Private Equity Partners L.P. (11) |
|
|
|
10.13 |
| Second Amendment, dated as of January 10, 2002, to the Note Purchase Agreement, dated as of March 27, 1998, between Dresdner Kleinwort Benson Private Equity Partners L.P. and Gardenburger, Inc. (14) |
|
|
|
10.14 |
| Third Amendment, dated as of September 30, 2002, to the Note Purchase Agreement, dated as of March 27, 1998, between Dresdner Kleinwort Benson Private Equity Partners L.P. and Gardenburger, Inc. (16) |
|
|
|
10.15 |
| Fourth Amendment, dated as of December 31, 2002, to the Note Purchase Agreement, dated as of March 27, 1998, by and among Dresdner Kleinwort Benson Private Equity Partners L.P. and Gardenburger, Inc. (17) |
|
|
|
10.16 |
| Fifth Amendment, dated as of December 29, 2003, to Note Purchase Agreement, dated as of March 27, 1998, between Gardenburger, Inc. and Dresdner Kleinwort Benson Private Equity Partners, L.P. (21) |
|
|
|
10.17 |
| Sixth Amendment, dated as of August 13, 2004, to Note Purchase Agreement, dated as of March 27, 1998, between Gardenburger, Inc. and Dresdner Kleinwort Benson Private Equity Partners, L.P. (29) |
49
Exhibit No. |
| Description |
10.18 |
| Amended and Restated Convertible Senior Subordinated Note dated January 10, 2002, issued by Gardenburger, Inc. to Dresdner Kleinwort Benson Private Equity Partners L.P. (14) |
|
|
|
10.19 |
| First Amendment, dated as of December 29, 2003, to Amended and Restated Convertible Senior Subordinated Note, dated as of January 10, 2002, between Gardenburger, Inc. and Dresdner Kleinwort Benson Private Equity Partners, |
|
|
|
10.20 |
| Second Amended and Restated Convertible Senior Subordinated Note dated September 2, 2004, issued by Gardenburger, Inc. to Annex Holdings I LP. (29) |
|
|
|
10.21 |
| Instrument of Adherence, dated as of September 2, 2004, between Dresdner Kleinwort Benson Private Equity Partners, L.P. and Annex Holdings I LP. (29) |
|
|
|
10.22 |
| Warrant Agreement, dated as of January 10, 2002, between Dresdner Kleinwort Benson Private Equity Partners L.P. and Gardenburger, Inc. (14) |
|
|
|
10.23 |
| Form of Warrant issued to Dresdner Kleinwort Benson Private Equity Partners L.P. and holders of Gardenburger Inc.’s preferred stock (14) |
|
|
|
10.24 |
| Amended and Restated Warrant, issued to Annex Holdings I LP, dated September 2, 2004. (29) |
|
|
|
10.25 |
| Registration Rights Agreement, dated as of March 27, 1998, between Gardenburger, Inc. and Dresdner Kleinwort Benson Private Equity Partners L.P. (4) |
|
|
|
10.26 |
| First Amendment, dated as of January 10, 2002, to Registration Rights Agreement, dated as of March 27, 1998, between Dresdner Kleinwort Benson Private Equity Partners L.P. and Gardenburger, Inc. (14) |
|
|
|
10.27 |
| Revolving Credit and Term Loan Agreement dated as of January 10, 2002, between Gardenburger, Inc., CapitalSource Finance LLC, as administrative agent and collateral agent for Lenders, and the Lenders (14) |
|
|
|
10.28 |
| First Amendment, dated as of September 30, 2002, to Revolving Credit and Term Loan Agreement, dated as of January 10, 2002, between CapitalSource Finance LLC and Gardenburger, Inc. (16) |
|
|
|
10.29 |
| Second Amendment, dated December 31, 2002, to Revolving Credit and Term Loan Agreement, dated January 10, 2002, between CapitalSource Finance LLC and Gardenburger, Inc. (17) |
|
|
|
10.30 |
| Third Amendment, dated March 31, 2003, to Revolving Credit and Term Loan Agreement, dated January 10, 2002, between CapitalSource Finance LLC and Gardenburger, Inc. (18) |
|
|
|
10.31 |
| Fourth Amendment, dated as of December 29, 2003, to Revolving Credit and Term Loan Agreement dated as of January 10, 2002, between Gardenburger, Inc. and CapitalSource Finance LLC (21) |
|
|
|
10.32 |
| Fifth Amendment, dated April 8, 2004, to Revolving Credit and Term Loan Agreement dated January 10, 2002 between CapitalSource Finance LLC and Gardenburger, Inc. (22) |
|
|
|
10.33 |
| Sixth Amendment, dated August 13, 2004, to Revolving Credit and Term Loan Agreement dated January 10, 2002 between CapitalSource Finance LLC and Gardenburger, Inc. (29) |
|
|
|
10.34 |
| Seventh Amendment, dated November 29, 2004, to Revolving Credit and Term Loan Agreement dated January 10, 2002 between CapitalSource Finance LLC and Gardenburger, Inc. (29) |
|
|
|
10.35 |
| Eighth Amendment to Revolving Credit and Term Loan Agreement, dated February 18, 2005, by and among Gardenburger, Inc., CapitalSource Finance LLC and the Lenders party thereto (27) |
|
|
|
10.36 |
| Ninth Amendment to Revolving Credit and Term Loan Agreement, dated August 9, 2005, by and among Gardenburger, Inc., CapitalSource Finance LLC and the Lenders party thereto (28) |
|
|
|
10.37 |
| Ratification and Amendment dated as of October 17, 2005 by and between Gardenburger, Inc. and CapitalSource Finance LLC (31) |
|
|
|
10.38 |
| Stock Purchase Agreement, dated March 29, 1999, by and between Gardenburger, Inc. and Rosewood Capital III, L.P., Farallon Capital Management LLC, Gruber & McBaine Capital Management, LLC, BT Capital Investors LP and certain other purchasers identified therein (6) |
50
Exhibit No. |
| Description |
10.39 |
| Amendment and Waiver of Stock Purchase Agreement, dated April 14, 1999, by and between Gardenburger, Inc., and the Purchasers identified on Exhibit A thereto (8) |
|
|
|
10.40 |
| Investor Rights Agreement, dated April 14, 1999, by and between Gardenburger, Inc., and the investors identified on Exhibit A thereto (8) |
|
|
|
10.41 |
| Preferred Stock Exchange Agreement, dated as of January 10, 2002, by and among the Company and the holders of its preferred stock (14) |
|
|
|
10.42 |
| Registration Rights Agreement, dated as of January 10, 2002, by and among the Company and the holders of its preferred stock (14) |
|
|
|
10.43 |
| Paul F. Wenner Stock Option Agreement dated January 20, 1992 (1) (5) |
|
|
|
10.44 |
| Amendment, effective May 8, 2001, to Stock Option Agreement dated January 20, 1992 between Gardenburger, Inc. and Paul F. Wenner (5) (12) |
|
|
|
10.45 |
| Amendment No. 2, dated as of December 22, 2003, to Stock Option Agreement dated January 20, 1992, between Gardenburger, Inc. and Paul F. Wenner (5) (21) |
|
|
|
10.46 |
| Amendment No. 3, dated May 12, 2004, to Stock Option Agreement dated January 20, 1992, between Gardenburger, Inc. and Paul F. Wenner (5) (22) |
|
|
|
10.47 |
| 1992 First Amended and Restated Combination Stock Option Plan, as amended (“1992 Plan”) (5) (9) |
|
|
|
10.48 |
| Form of Incentive Stock Option Agreement for Option grants to executive officers under 1992 Plan after May 24, |
|
|
|
10.49 |
| Form of Non-Statutory Stock Option Agreement for Option grants to executive officers under 1992 Plan after May 24, 1995 (5) (7) |
|
|
|
10.50 |
| Incentive Stock Option Agreement with Scott C. Wallace dated January 15, 2001 (5) (15) |
|
|
|
10.51 |
| 2001 Stock Incentive Plan as Amended and Restated Effective June 1, 2001 (“2001 Plan”) (5) (12) |
|
|
|
10.52 |
| Form of Award Agreement under the Gardenburger, Inc. 2001 Stock Incentive Plan (5) (18) |
|
|
|
10.53 |
| Form of Director Nonqualified Stock Option Agreement under 2001 Plan (5) (15) |
|
|
|
10.54 |
| Employment Agreement dated February 24, 2004 between Gardenburger, Inc. and Scott C. Wallace (5) (22) |
|
|
|
10.55 |
| Amendment to Employment Agreement dated March 24, 2005, by and between Gardenburger, Inc. and Scott C. Wallace (5) (32) |
|
|
|
10.56 |
| Employment Agreement, dated February 26, 2004, between Gardenburger, Inc. and James W. Linford (5) (22) |
|
|
|
10.57 |
| Amendment to Employment Agreement dated March 24, 2005, by and between Gardenburger, Inc. and James W. Linford (5) (32) |
|
|
|
10.58 |
| Employment Agreement dated February 26, 2004 by and between Gardenburger, Inc. and Robert T. Trebing, |
|
|
|
10.59 |
| Amendment to Employment Agreement dated March 24, 2005, by and between Gardenburger, Inc. and Robert T. Trebing, Jr. (5) (32) |
|
|
|
10.60 |
| Employment Agreement, dated February 26, 2004, by and between Gardenburger, Inc. and Robert Dixon (5) (24) |
|
|
|
10.61 |
| Amendment to Employment Agreement dated March 24, 2005, by and between Gardenburger, Inc. and Robert |
|
|
|
10.62 |
| Employment Agreement, dated February 26, 2004, by and between Gardenburger, Inc. and Lori Luke (5) (24) |
|
|
|
10.63 |
| Amendment to Employment Agreement dated March 24, 2005, by and between Gardenburger, Inc. and Lori |
51
Exhibit No. |
| Description |
10.64 |
| Form of Indemnification Agreement between Gardenburger, Inc. and its Officers and Directors (5) (7) |
|
|
|
10.65 |
| Option Agreement dated April 14, 1996 between Gardenburger, Inc. and Lyle G. Hubbard relating to 300,000 shares of common stock (5) (16) |
|
|
|
10.66 |
| Licensing Agreement, dated May 12, 2004, between Gardenburger, Inc. and Paul F. Wenner (22) |
|
|
|
10.67 |
| Second Amended and Restated Retention Agreement, dated July 19, 2005, by and between Gardenburger, Inc. and Scott C. Wallace (5) (26) |
|
|
|
10.68 |
| Second Amended and Restated Retention Agreement, dated July 19, 2005, by and between Gardenburger, Inc. and James W. Linford (5) (26) |
|
|
|
10.69 |
| Second Amended and Restated Retention Agreement, dated July 19, 2005, by and between Gardenburger, Inc. and Robert T. Trebing, Jr. (5) (26) |
|
|
|
10.70 |
| Second Amended and Restated Retention Agreement, dated July 19, 2005, by and between Gardenburger, Inc. and Robert Dixon (5) (26) |
|
|
|
10.71 |
| Second Amended and Restated Retention Agreement, dated July 19, 2005, by and between Gardenburger, Inc. and Lori Luke (5) (26) |
|
|
|
10.72 |
| Separation Agreement, dated August 26, 2005, by and between Robert T. Trebing, Jr. and Gardenburger, Inc. (5) (30) |
|
|
|
10.73 |
| Consulting Agreement, dated August 26, 2005, by and between Robert T. Trebing, Jr. and Gardenburger, Inc. (5) (30) |
|
|
|
10.74 |
| Credit and Security Agreement, dated November 22, 2005, by and between Wells Fargo Bank, National Association (acting through its Wells Fargo Business Credit operating division) and Gardenburger, Inc. (33) |
|
|
|
10.75 |
| Credit and Security Agreement, dated November 22, 2005, by and between GB Retail Funding, LLC and Gardenburger, Inc. (33) |
|
|
|
14 |
| Code of Ethics (20) |
|
|
|
16.1 |
| Letter re: Change in Certifying Accountant (23) |
|
|
|
16.2 |
| Letter re: Change in Certifying Accountant (25) |
|
|
|
18 |
| Letter re: Change in Accounting Principle (29) |
|
|
|
23.1 |
| Consent of Haskell & White LLP, Independent Registered Public Accounting Firm |
|
|
|
23.2 |
| Consent of BDO Seidman, LLP, Independent Registered Public Accounting Firm |
|
|
|
23.3 |
| Consent of KPMG LLP, Independent Registered Public Accounting Firm |
|
|
|
31.1 |
| Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934. |
|
|
|
31.2 |
| Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934. |
|
|
|
32 |
| Certifications Pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |
52
(1) | Incorporated by reference to the Company’s 1992 Form 10-K Annual Report, filed March 23, 1993. |
(2) | Incorporated by reference to the Company’s Form 10-Q Quarterly Report for the quarter ended June 30, 1997, filed August 14, 1997 |
(3) | Incorporated by reference to the Company’s 1997 Form 10-K Annual Report, filed March 31, 1998. |
(4) | Incorporated by reference to the Company’s Form 10-Q for the quarter ended March 31, 1998, filed May 15, 1998. |
(5) | Management contract or compensatory plan or arrangement. |
(6) | Incorporated by reference to the Company’s Form 8-K Current Report, filed April 1, 1999. |
(7) | Incorporated by reference to the Company’s Form 10-K for the year ended December 31, 1998, filed March 31, 1999. |
(8) | Incorporated by reference to the Company’s Form 10-Q for the quarter ended March 31, 1999, filed May 17, 1999. |
(9) | Incorporated by reference to the Company’s Form 10-Q for the quarter ended June 30, 1999, filed August 13, 1999. |
(10) | Incorporated by reference to the Company’s Registration Statement on Form S-8 (No. 333-92665), filed December 13, 1999. |
(11) | Incorporated by reference to the Company’s Form 10-Q for the quarter ended December 31, 1999, filed February 9, 2000. |
(12) | Incorporated by reference to the Company’s Form 10-Q for the quarter ended December 31, 2001, filed February 13, 2002. |
(13) | Incorporated by reference to the Company’s Form 10-Q for the quarter ended June 30, 2002, filed August 9, 2002. |
(14) | Incorporated by reference to the Company’s Form 8-K dated January 10, 2002 and filed January 17, 2002. |
(15) | Incorporated by reference to the Company’s 2001 Form 10-K Annual Report, filed December 10, 2001. |
(16) | Incorporated by reference to the Company’s 2002 Form 10-K Annual Report, filed December 19, 2002. |
(17) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2002, filed February 13, 2003. |
(18) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, filed May 14, 2003. |
(19) | Incorporated by reference to the Company’s Form 8-K dated August 18, 2003 and filed August 19, 2003. |
(20) | Incorporated by reference to the Company’s Form 10-K for the year ended September 30, 2003 and filed December 29, 2003. |
(21) | Incorporated by reference to the Company’s Form 10-Q for the quarter ended December 31, 2003 and filed February 17, 2004. |
(22) | Incorporated by reference to the Company’s Form 10-Q for the quarter ended June 30, 2004 and filed August 16, 2004. |
(23) | Incorporated by reference to the Company’s Form 8-K dated June 25, 2004 and filed July 2, 2004. |
(24) | Incorporated by reference to the Company’s Form 8-K dated January 27, 2005 and filed February 1, 2005. |
(25) | Incorporated by reference to the Company’s Form 8-K dated February 22, 2005 and filed February 28, 2005. |
(26) | Incorporated by reference to the Company’s Form 8-K dated July 19, 2005 and filed July 20, 2005. |
(27) | Incorporated by reference to the Company’s Form 8-K dated February 18, 2005 and filed February 22, 2005. |
(28) | Incorporated by reference to the Company’s Form 10-Q for the quarter ended June 30, 2005 and filed August 15, 2005. |
(29) | Incorporated by reference to the Company’s Form 10-K for the year ended September 30, 2004 and filed February 18, 2005. |
(30) | Incorporated by reference to the Company’s Form 8-K dated August 26, 2005 and filed August 30, 2005. |
(31) | Incorporated by reference to the Company’s Form 8-K dated October 17, 2005 and filed October 21, 2005. |
(32) | Incorporated by reference to the Company’s Form 8-K dated March 24, 2005 and filed March 30, 2005. |
(33) | Incorporated by reference to the Company’s Form 8-K dated November 22, 2005 and filed November 29, 2005. |
53
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: December 16, 2005 |
|
|
| ||
|
| GARDENBURGER, INC. |
| ||
|
|
| |||
|
| By: | /s/ ROBERT T. TREBING, JR. |
| |
|
| Robert T. Trebing, Jr. | |||
|
| Chief Financial Officer | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on December 16, 2005.
Signature |
| Title | |
|
|
| |
/s/ SCOTT C. WALLACE |
|
| Director, Chairman, President |
Scott C. Wallace |
|
| and Chief Executive Officer |
|
|
| (Principal Executive Officer) |
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|
|
|
|
|
|
/s/ ROBERT T. TREBING, JR. |
|
| Chief Financial Officer |
Robert T. Trebing, Jr. |
|
| (Principal Financial and Accounting Officer) |
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|
|
/s/ CHARLES E. BERGERON |
|
| Director |
Charles E. Bergeron |
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|
/s/ BARRY E. KRANTZ |
|
| Director |
Barry E. Krantz |
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|
/s/ RICHARD L. MAZER |
|
| Director |
Richard L. Mazer |
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|
/s/ PAUL F. WENNER |
|
| Founder and Director |
Paul F. Wenner |
|
|
|
54
Report of Independent Registered Public Accounting Firm
The Board of Directors
Gardenburger, Inc.:
We have audited the accompanying balance sheet of Gardenburger, Inc. (the “Company”) (an Oregon corporation) as of September 30, 2005, and the related statements of operations, shareholders’ deficit and cash flows for the year then ended. In connection with our audit of the financial statements, we also have audited the supplementary information included in Schedule II. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gardenburger, Inc. as of September 30, 2005, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company is out of compliance with debt covenants, has a working capital deficiency, negative operating cash flow in fiscal 2004, has suffered substantial recurring losses and, in October 2005, filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Haskell & White LLP |
|
Irvine, California | |
December 14, 2005 |
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors
Gardenburger, Inc.:
We have audited the accompanying balance sheet of Gardenburger, Inc. (the “Company”) (an Oregon corporation) as of September 30, 2004, and the related statements of operations, shareholders’ deficit and cash flows for the year then ended. In connection with our audit of the financial statements, we also have audited the supplementary information included in Schedule II. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. The financial statements and financial statement schedule of Gardenburger, Inc. for the year ended September 30, 2003 were audited by another independent registered public accounting firm. That firm expressed an unqualified opinion on those financial statements in their report dated November 7, 2003, except as to Note 16 to those financial statements, which was as of December 29, 2003.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gardenburger, Inc. as of September 30, 2004, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As described in Note 4 to the financial statements for the year ended September 30, 2004, the Company changed its method of accounting for slotting fees as of October 1, 2003.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has a working capital deficiency, negative operating cash flow, and has suffered substantial recurring losses. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP |
|
Costa Mesa, California | |
December 29, 2004, except for Note 18, paragraphs 1 and 4, as to which the date is February 18, 2005. |
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors
Gardenburger, Inc.:
We have audited the accompanying statements of operations, shareholders’ deficit and cash flows for the year ended September 30, 2003. In connection with our audit of the financial statements, we also have audited financial statement schedule II. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Gardenburger, Inc. for the year ended September 30, 2003 in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As described in Note 4, the financial statements for the year ended September 30, 2003 include the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
/s/ KPMG LLP |
|
Portland, Oregon | |
November 7, 2003 |
F-3
GARDENBURGER, INC.
(In thousands, except share amounts)
|
| September 30, |
| ||||
|
| 2005 |
| 2004 |
| ||
Assets |
|
|
|
|
| ||
Current Assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 13 |
| $ | 5 |
|
Restricted cash |
| 174 |
| 166 |
| ||
Accounts receivable, net of allowances of $100 and $104 at September 30, 2005 and 2004, respectively |
| 3,219 |
| 2,848 |
| ||
Inventories, net |
| 6,361 |
| 8,964 |
| ||
Prepaid expenses |
| 1,351 |
| 1,155 |
| ||
Total current assets |
| 11,118 |
| 13,138 |
| ||
|
|
|
|
|
| ||
Machinery, equipment and leasehold improvements, net of accumulated depreciation of $15,065 and $13,303 at September 30, 2005 and 2004, respectively |
| 8,417 |
| 10,650 |
| ||
Other assets, net of accumulated amortization of $89 and $1,725 at September 30, 2005 and 2004, respectively |
| 326 |
| 696 |
| ||
Total assets |
| $ | 19,861 |
| $ | 24,484 |
|
|
|
|
|
|
| ||
Liabilities and Shareholders’ Deficit |
|
|
|
|
| ||
Current Liabilities: |
|
|
|
|
| ||
Short-term note payable |
| $ | 5,244 |
| $ | 4,791 |
|
Current portion of long-term debt |
| 2,861 |
| 2,000 |
| ||
Convertible note payable |
| 27,988 |
| — |
| ||
Accounts payable |
| 3,467 |
| 2,905 |
| ||
Accrued payroll and employee benefits |
| 1,294 |
| 475 |
| ||
Other current liabilities |
| 634 |
| 3,583 |
| ||
Total current liabilities |
| 41,488 |
| 13,754 |
| ||
|
|
|
|
|
| ||
Long-term debt, less current maturities |
| — |
| 3,513 |
| ||
Convertible note payable |
| — |
| 19,392 |
| ||
Total long-term debt |
| — |
| 22,905 |
| ||
|
|
|
|
|
| ||
Convertible redeemable preferred stock, liquidation preference of $62,004 and $58,104 at September 30, 2005 and 2004, respectively, and 650,000 shares outstanding |
| 60,352 |
| 55,851 |
| ||
|
|
|
|
|
| ||
Commitments, contingencies and subsequent events |
|
|
|
|
| ||
|
|
|
|
|
| ||
Shareholders’ Deficit: |
|
|
|
|
| ||
Preferred stock, no par value, 5,000,000 shares authorized |
| — |
| — |
| ||
Common stock, no par value, 25,000,000 shares authorized; 9,002,101 shares issued and outstanding at September 30, 2005 and 2004 |
| 11,189 |
| 11,189 |
| ||
Additional paid-in capital |
| 12,500 |
| 12,500 |
| ||
Accumulated deficit |
| (105,668 | ) | (91,715 | ) | ||
Total shareholders’ deficit |
| (81,979 | ) | (68,026 | ) | ||
Total liabilities and shareholders’ deficit |
| $ | 19,861 |
| $ | 24,484 |
|
See accompanying notes to financial statements.
F-4
GARDENBURGER, INC.
(In thousands, except share and per share amounts)
|
| For the Year Ended September 30, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
Net sales |
| $ | 46,055 |
| $ | 48,580 |
| $ | 49,447 |
|
Cost of goods sold |
| 30,095 |
| 32,273 |
| 30,709 |
| |||
Gross margin |
| 15,960 |
| 16,307 |
| 18,738 |
| |||
|
|
|
|
|
|
|
| |||
Operating expenses: |
|
|
|
|
|
|
| |||
Sales and marketing |
| 12,213 |
| 13,844 |
| 14,208 |
| |||
General and administrative |
| 6,105 |
| 3,898 |
| 5,218 |
| |||
Other operating (income) expense, net |
| (20 | ) | (16 | ) | 105 |
| |||
|
| 18,298 |
| 17,726 |
| 19,531 |
| |||
Operating loss |
| (2,338 | ) | (1,419 | ) | (793 | ) | |||
|
|
|
|
|
|
|
| |||
Other income (expense): |
|
|
|
|
|
|
| |||
Interest income |
| 1 |
| 2 |
| 11 |
| |||
Interest expense |
| (7,115 | ) | (4,620 | ) | (4,420 | ) | |||
|
| (7,114 | ) | (4,618 | ) | (4,409 | ) | |||
Loss before cumulative effect of a change in accounting for slotting fees and goodwill and preferred dividends |
| (9,452 | ) | (6,037 | ) | (5,202 | ) | |||
Cumulative effect of a change in accounting for slotting fees |
| — |
| (1,150 | ) | — |
| |||
Cumulative effect of a change in accounting for goodwill |
| — |
| — |
| (411 | ) | |||
Net loss |
| (9,452 | ) | (7,187 | ) | (5,613 | ) | |||
Preferred dividends |
| 4,501 |
| 4,839 |
| 5,177 |
| |||
Net loss applicable to common shareholders |
| $ | (13,953 | ) | $ | (12,026 | ) | $ | (10,790 | ) |
|
|
|
|
|
|
|
| |||
Basic and diluted loss per share before cumulative effect of changes in accounting principle |
| $ | (1.55 | ) | $ | (1.21 | ) | $ | (1.15 | ) |
|
|
|
|
|
|
|
| |||
Basic and diluted loss per share for cumulative effect of changes in accounting principle |
| — |
| (0.13 | ) | (0.05 | ) | |||
|
|
|
|
|
|
|
| |||
Basic and diluted net loss per share applicable to common shareholders |
| $ | (1.55 | ) | $ | (1.34 | ) | $ | (1.20 | ) |
|
|
|
|
|
|
|
| |||
Shares used in basic and diluted per share caluclations |
| 9,002,101 |
| 9,002,101 |
| 9,002,101 |
|
See accompanying notes to financial statements.
F-5
GARDENBURGER, INC.
STATEMENTS OF SHAREHOLDERS’ DEFICIT
(In thousands, except share amounts)
|
|
|
|
|
| Additional |
|
|
| Total |
| ||||
|
| Common Stock |
| Paid-In |
| Accumulated |
| Shareholders’ |
| ||||||
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Deficit |
| ||||
Balance at September 30, 2002 |
| 9,002,101 |
| $ | 11,189 |
| $ | 12,500 |
| $ | (68,899 | ) | $ | (45,210 | ) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Accrual of preferred dividends |
| — |
| — |
| — |
| (5,177 | ) | (5,177 | ) | ||||
Net loss |
| — |
| — |
| — |
| (5,613 | ) | (5,613 | ) | ||||
Balance at September 30, 2003 |
| 9,002,101 |
| 11,189 |
| 12,500 |
| (79,689 | ) | (56,000 | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Accrual of preferred dividends |
| — |
| — |
| — |
| (4,839 | ) | (4,839 | ) | ||||
Net loss |
| — |
| — |
| — |
| (7,187 | ) | (7,187 | ) | ||||
Balance at September 30, 2004 |
| 9,002,101 |
| 11,189 |
| 12,500 |
| (91,715 | ) | (68,026 | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Accrual of preferred dividends |
| — |
| — |
| — |
| (4,501 | ) | (4,501 | ) | ||||
Net loss |
| — |
| — |
| — |
| (9,452 | ) | (9,452 | ) | ||||
Balance at September 30, 2005 |
| 9,002,101 |
| $ | 11,189 |
| $ | 12,500 |
| $ | (105,668 | ) | $ | (81,979 | ) |
See accompanying notes to financial statements.
F-6
GARDENBURGER, INC.
(In thousands)
|
| For the Year Ended September 30, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
| |||
Net loss |
| $ | (9,452 | ) | $ | (7,187 | ) | $ | (5,613 | ) |
Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities: |
|
|
|
|
|
|
| |||
Depreciation and amortization |
| 2,893 |
| 3,043 |
| 3,236 |
| |||
Cumulative effect of a change in accounting for slotting fees |
| — |
| 1,150 |
| — |
| |||
Cumulative effect of a change in accounting for goodwill |
| — |
| — |
| 411 |
| |||
Accrual of long-term debt and convertible note payable exit fees |
| 2,176 |
| 875 |
| 1,349 |
| |||
Accrual of Annex interest |
| 1,598 |
| — |
| — |
| |||
Accrual of Annex amendment fee |
| 250 |
| — |
| — |
| |||
(Gain) loss on sale of other assets |
| 3 |
| (16 | ) | 105 |
| |||
Increase (decrease) in cash from changes in: |
|
|
|
|
|
|
| |||
Restricted cash |
| (8 | ) | 26 |
| 225 |
| |||
Accounts receivable, net |
| (371 | ) | 112 |
| 167 |
| |||
Inventories, net |
| 2,603 |
| 227 |
| (98 | ) | |||
Prepaid expenses |
| (196 | ) | (216 | ) | (523 | ) | |||
Accounts payable |
| 562 |
| 359 |
| 206 |
| |||
Accrued payroll and employee benefits |
| 819 |
| (229 | ) | (18 | ) | |||
Other current liabilities |
| 1,621 |
| 1,284 |
| 2,077 |
| |||
Net cash provided by (used in) operating activities |
| 2,498 |
| (572 | ) | 1,524 |
| |||
|
|
|
|
|
|
|
| |||
Cash flows from investing activities: |
|
|
|
|
|
|
| |||
Payments for purchase of machinery, equipment and leasehold improvements |
| (268 | ) | (1,444 | ) | (1,962 | ) | |||
Proceeds from sale of other assets |
| — |
| 113 |
| — |
| |||
Net cash used in investing activities |
| (268 | ) | (1,331 | ) | (1,962 | ) | |||
|
|
|
|
|
|
|
| |||
Cash flows from financing activities: |
|
|
|
|
|
|
| |||
Proceeds from line of credit, net |
| 453 |
| 2,608 |
| 1,067 |
| |||
Payments on long-term debt |
| (2,000 | ) | (1,455 | ) | (1,902 | ) | |||
Payment of CapitalSource exit fee |
| (650 | ) | — |
| — |
| |||
Capitalized financing fees |
| (25 | ) | (315 | ) | — |
| |||
Net cash (used in) provided by financing activities |
| (2,222 | ) | 838 |
| (835 | ) | |||
|
|
|
|
|
|
|
| |||
Increase (decrease) in cash and cash equivalents |
| 8 |
| (1,065 | ) | (1,273 | ) | |||
|
|
|
|
|
|
|
| |||
Cash and cash equivalents: |
|
|
|
|
|
|
| |||
Beginning of period |
| 5 |
| 1,070 |
| 2,343 |
| |||
End of period |
| $ | 13 |
| $ | 5 |
| $ | 1,070 |
|
|
|
|
|
|
|
|
| |||
Supplemental Cash Flow Information |
|
|
|
|
|
|
| |||
Cash paid during the period for income taxes |
| $ | 17 |
| $ | 5 |
| $ | 7 |
|
Cash paid during the period for interest |
| 924 |
| 983 |
| 2,017 |
| |||
Non-cash preferred dividends |
| 4,501 |
| 4,839 |
| 5,177 |
| |||
|
|
|
|
|
|
|
| |||
Supplemental Non-Cash Information |
|
|
|
|
|
|
| |||
Reclassification of accrued interest from other current liabilities to convertible note payable |
| $ | 4,570 |
| $ | — |
| $ | — |
|
Write-off of fully depreciated machinery, equipment and leasehold improvements |
| 739 |
| — |
| — |
|
See accompanying notes to financial statements.
F-7
GARDENBURGER, INC.
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Gardenburger, Inc. was incorporated in Oregon in 1985 to provide a line of meatless food products in response to the public’s awareness of the importance of diet to overall health and fitness. Toward this end, we developed and now produce and distribute frozen, meatless food products, consisting of veggie burgers and soy-based: i) burgers; ii) chicken; iii) pork; and iv) other products. Our products are sold principally to retail and food service customers throughout the United States.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates. Management believes that the estimates used are reasonable. Significant estimates made by management include estimates for bad debts, excess and obsolete inventory, coupon liabilities and other trade spending liabilities.
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities at the date of purchase of 90 days or less.
Restricted Cash
Pursuant to our line of credit agreement, cash receipts related to our accounts receivable are deposited into a lockbox and are then applied against our line of credit balance, generally the next business day. Accordingly, cash in our lockbox is considered restricted.
Fair Value of Financial Instruments
The carrying amounts of our financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to the short maturities of these financial instruments. Our convertible notes are also considered a financial instrument, however, their fair value is not readily determinable due to their being held by a single entity and the lack of a public trading market.
Accounts Receivable and Allowances for Uncollectible Accounts
Credit limits are established through a process of reviewing the financial history and stability of each customer. We regularly evaluate the collectibility of our trade receivable balances by monitoring past due balances. If it is determined that a customer will be unable to meet its financial obligation, we record a specific reserve for bad debts to reduce the related receivable to the amount we expect to recover. Historically, bad debts have not had a material effect on us. If circumstances related to specific customers deteriorate, our estimates of the recoverability of receivables associated with those customers could materially change.
Inventories
Inventories are valued at the lower of cost (based on standard costs, which approximate the first-in, first-out (FIFO) method) or market, and include materials, labor and manufacturing overhead.
Contract Origination Costs
Costs incurred for the origination of certain distribution and other contracts are included as a prepaid asset on our balance sheet and amortized over the life of the related contract. Such costs are refundable to us should the contract be terminated prior to completion. At September 30, 2005 and 2004, prepaid assets included $116,000 and $209,000, respectively, of contract origination costs.
F-8
Machinery, Equipment and Leasehold Improvements
Machinery and equipment and leasehold improvements are stated at cost. Significant improvements are capitalized and maintenance and repairs are expensed. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lease term or the estimated useful life of the asset, whichever is shorter. Machinery and equipment are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” We evaluate recoverability of property, plant and equipment to be held and used by comparing the carrying amount of an asset to estimated future net undiscounted cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. We determined that no impairment existed as of September 30, 2005.
Estimated useful lives are as follows:
Leasehold improvements |
| 5 - 12 years |
|
Office furniture and equipment |
| 3 - 10 years |
|
Machinery and equipment |
| 3 - 15 years |
|
Vehicles |
| 5 years |
|
Other Assets
As of September 30, 2005, other assets consist of trademarks. In prior periods, other assets also included deferred financing fees. However, as discussed in Note 2, our deferred financing fees were fully written off during fiscal 2005. Trademarks are amortized using the straight-line method over forty years. Trademarks are reviewed for impairment and changes in their estimated remaining useful lives whenever events or circumstances indicate that the carrying amount of assets may not be recoverable in accordance with SFAS No. 144. We evaluate recoverability by comparing the carrying amount of the assets to estimated future net undiscounted cash flows to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. We determined that no impairment existed as of September 30, 2005. See also Note 4 regarding the write-off of our goodwill balance in fiscal 2003.
Segment and Enterprise-Wide Reporting
We disclose segment enterprise-wide information in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Based upon definitions contained within SFAS No. 131, we have determined that we operate in one segment. In addition, virtually all sales are domestic, and all of our long-lived assets are located within the United States.
Concentrations of Credit Risk and Significant Customers
We invest any excess cash with high credit quality financial institutions, which bear minimal risk, and, by policy, limit the amount of credit exposure to any one financial institution.
For fiscal 2005, two customers accounted for approximately 14% and 13% of gross sales, respectively, and approximately 14% and 25% of the gross accounts receivable balance at September 30, 2005, respectively. One additional customer represented approximately 9% of our accounts receivable balance at September 30, 2005.
For fiscal 2004, three customers accounted for approximately 12%, 10% and 8% of gross sales, respectively, and approximately 7%, 12% and 14% of the gross accounts receivable balance at September 30, 2004, respectively.
For fiscal 2003, three customers accounted for approximately 13%, 12% and 9% of gross sales, respectively.
Historically, we have not incurred significant losses related to accounts receivable.
F-9
Revenue Recognition and Sales Incentives
In accordance with Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”), revenues are recognized upon passage of title to the customer, typically upon product pick-up, shipment or delivery to customers.
Our revenue arrangements with our customers often include sales incentives and other promotional costs such as coupons, volume-based discounts, slotting fees and off-invoice discounts. These costs are typically referred to collectively as “trade spending.” Pursuant to EITF No. 00-14, EITF No. 00-25 and EITF No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products),” these costs are recorded when revenue is recognized and are generally classified as a reduction of revenue. We do not provide for sales returns since, historically, sales returns have not been significant. See also Note 4 for a discussion of a change in accounting for slotting fees.
Trade Spending
Certain trade spending items are subject to estimation. We are required to make estimates regarding the level of coupon redemption, the amount of product to be purchased by certain customers over certain time periods and related volume-based and off-invoice discounts, and slotting fees based on product shipments in order to estimate our overall trade spending. These estimates are reviewed and recorded on a monthly basis based on information provided by our regional sales managers as to the types of arrangements that have been made with our customers, historical results and current period activity, and are recorded in our financial statements as an offset to sales and trade receivables. Trade spending totaled $9.0 million in fiscal 2005, $12.1 million in fiscal 2004 and $11.8 million in fiscal 2003. If our estimates are not reflective of actual results, we may be required to record adjustments that could materially affect our results of operations and financial condition for any given period.
Slotting Fees
Slotting fees are a type of trade spending and refer to oral arrangements pursuant to which the retail grocer allows our products to be placed on the store’s shelves in exchange for a slotting fee. Typically, 12 months is the estimated minimum period during which a retailer agrees to allocate shelf space. However, given that there are no written contractual commitments requiring the retail grocers to allocate shelf space for twelve months, we expense the slotting fees as a reduction of sales in determining net sales in the period the related revenue is recognized for the first shipment of the related product. The level of slotting fees varies based on the number of new product introductions, potential product reintroductions and in what sales channels products are introduced. Slotting fees, which are included as a component of total trade spending, totaled $0.4 million in fiscal 2005, $3.1 million in fiscal 2004 and $2.2 million (pro forma) in fiscal 2003. Prior to fiscal 2004, we capitalized and amortized slotting fees over a 12-month period and, accordingly, the fiscal 2003 amount is pro forma assuming it was computed based on our current accounting policy. See also Note 4 for a discussion of a change in accounting for slotting fees.
Shipping and Freight Charges
We incur costs related to shipping and handling of our manufactured products, which amounted to $1.3 million, $1.6 million and $1.4 million for fiscal 2005, 2004 and 2003, respectively. We expense these costs as incurred as a component of sales and marketing expense. We also incur shipping and handling charges related to the receipt of raw materials, which are recorded as a component of cost of goods sold. Payments received from customers for shipping and handling costs are included as a component of net sales upon recognition of the related sale.
Advertising Costs
Advertising costs, including media advertising, design and printing of coupons, and other advertising, which are included in sales and marketing expense, are expensed when the advertising first takes place. Advertising expense was approximately $741,000 in fiscal 2005, $602,000 in fiscal 2004 and $572,000 in fiscal 2003.
F-10
Spoils Costs
Expenses for spoils, which are incurred after our products are received by our customers, were approximately $543,000 in fiscal 2005, $385,000 in fiscal 2004 and $293,000 in fiscal 2003 and are included in sales and marketing expense.
Research and Development Costs
Our research and development activities are focused on identifying existing nutritional benefits and selectively adding benefits important to vegetarians, as well as improvement and increased efficiency in the manufacturing process. We continue to develop non-burger items such as breakfast sausage, cutlets and nuggets to meet the needs of the variety-seeking consumer. We conduct our research and development activities at our facilities in Clearfield, Utah. Research and development costs are expensed as incurred. Research and development expense was approximately $357,000 in fiscal 2005, $272,000 in fiscal 2004 and $235,000 in fiscal 2003 and is included in sales and marketing expenses in the accompanying statements of operations.
Net Loss Per Share
Basic loss per share is calculated using the weighted average number of common shares outstanding for the period and diluted loss per share is computed using the weighted average number of common shares and dilutive common equivalent shares outstanding.
Basic net loss per share and diluted net loss per share are the same for all periods presented since we were in a loss position in all periods. Potentially dilutive securities that are not included in the diluted loss per share calculations because they would be antidilutive are as follows (in thousands):
|
| Year Ended September 30, |
| ||||
|
| 2005 |
| 2004 |
| 2003 |
|
Stock options |
| 2,129 |
| 3,023 |
| 3,929 |
|
Stock warrants |
| 1,116 |
| 1,116 |
| 1,116 |
|
Convertible Note |
| 1,753 |
| 1,730 |
| 1,730 |
|
Convertible preferred stock |
| 4,062 |
| 4,062 |
| 4,062 |
|
Total |
| 9,060 |
| 9,931 |
| 10,837 |
|
Comprehensive Income Reporting
SFAS No. 130, “Reporting Comprehensive Income” establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. The objective of SFAS No. 130 is to report a measure of all changes in the equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. Comprehensive loss did not differ from currently reported net loss in the periods presented.
Stock Based Compensation Plans
We account for stock options using the intrinsic value method as prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Pursuant to SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended, we have computed, for pro forma disclosure purposes, the impact on net loss and net loss per share as if we had accounted for our stock-based compensation plans in accordance with the fair value method prescribed by SFAS No. 123 as follows (in thousands, except per share amounts):
|
| Year Ended September 30, |
| ||||||
|
| 2005 |
| 2004 |
| 2003 |
| ||
Net loss applicable to common shareholders, as reported |
| $ | (13,953 | ) | (12,026 | ) | $ | (10,790 | ) |
Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards |
| (165 | ) | (201 | ) | (450 | ) | ||
Net loss applicable to common shareholders, pro forma |
| $ | (14,118 | ) | (12,227 | ) | $ | (11,240 | ) |
|
|
|
|
|
|
|
| ||
Basic and diluted net loss per share applicable to common shareholders – as reported |
| $ | (1.55 | ) | (1.34 | ) | $ | (1.20 | ) |
Basic and diluted net loss per share applicable to common shareholders – pro forma |
| $ | (1.57 | ) | (1.36 | ) | $ | (1.25 | ) |
There were no options granted during fiscal 2005, 2004 or 2003.
F-11
SFAS No. 123R, “Share-Based Payment,” requires companies to recognize in their income statement the grant-date fair value of stock options and other equity-based compensation issued to employees. We adopted SFAS No. 123R effective October 1, 2005. Unamortized stock-based compensation expense, on a pro forma basis, as of September 30, 2005 totaled $190,000, with $144,000 to be amortized in fiscal 2006 and $46,000 to be amortized in fiscal 2007.
Reclassifications
Certain reclassifications have been made to the prior year amounts to conform to the current year presentation.
2. GOING CONCERN AND CHAPTER 11 FILING
Our financial statements have been presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. However, as discussed below, we were out of compliance with certain debt covenants as of June 30, 2005 and September 30, 2005. Because of such non-compliance, we classified all of our outstanding debt as current beginning with our June 30, 2005 balance sheet. In addition, as a result of CapitalSource Finance, LLC (“CapitalSource”) and Annex Holdings I LP (“Annex”) having the ability to call our debt at any point in time, all related exit fees were accrued and all remaining deferred financing fees were written off during the third quarter of fiscal 2005.
Both CapitalSource and Annex currently have the right to declare all of the outstanding amounts due to them under their respective agreements immediately due and payable; however, the outstanding indebtedness due and payable to CapitalSource was refinanced as described below. We do not currently have the cash or alternative financing source needed in order to pay such amounts. In addition, we have a working capital deficiency, incurred substantial net losses applicable to common shareholders for fiscal years 2005, 2004 and 2003 and had negative operating cash flow in 2004. We had a total shareholders’ deficit at September 30, 2005 of $82.0 million. We are highly leveraged and have significant annual interest and dividend accruals related to our convertible note payable and convertible redeemable preferred stock, which contribute to our net losses and shareholders’ deficit.
Operating under this heavy debt burden and facing a continuing decline in our product category and increased competition during 2005, we determined that in order to maximize value for our creditors and, if feasible, preferred shareholders, we moved forward with an effort to sell our business as a going concern. We made this decision recognizing (i) the likelihood that we did not have sufficient resources or credit availability to effectively defend our market share in the grocery channel under existing circumstances, (ii) the significant risk that our enterprise value would further erode if we continued to operate our business on a highly leveraged basis, and (iii) that there was substantial doubt, if we continued to operate under our existing debt burden, regarding our ability to continue as a going concern. Based on our going concern sale efforts in fiscal 2005, we have determined that the value of Gardenburger is inadequate to allow for any recovery or retention of rights by our equity holders.
Following several unsuccessful efforts to sell Gardenburger as a going concern over the past six years, including our fiscal 2005 efforts, as well as unsuccessful efforts to restructure and recapitalize Gardenburger, partially due to a lack of consensus between Annex and our preferred shareholders regarding distribution of the proceeds of a sale and the allocation of rights under a restructuring, on October 14, 2005, we filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Central District of California, Santa Ana Division (the “Bankruptcy Court”) (Case No. SA 05-19539-JB) (the “Chapter 11 Case”). In connection with this Chapter 11 Case, on December 9, 2005, we filed a Plan of Reorganization (the “Plan”) and a related Disclosure Statement with the Bankruptcy Court.
F-12
Significant terms of the Plan are as follows:
• Amounts due to holders of general unsecured claims will be fully paid over an 18 month period;
• All outstanding preferred stock and common stock will be terminated with no compensation to the holders thereof, thereby converting Gardenburger to a privately held company from a publicly held company;
• Elimination of all principal, accrued interest and accrued exit fees due pursuant to our Note Purchase Agreement, as amended, and Second Amended and Restated Convertible Senior Subordinated Note, as amended (the “Convertible Note”) held by Annex, which totaled $28.0 million as of September 30, 2005, and issuance of new equity interests in Gardenburger to Annex in full satisfaction of this claim;
• Payment of all principal and accrued interest due pursuant to our Revolving Credit and Term Loan Agreement, as amended (the “Loan Agreement”) with CapitalSource, which totaled approximately $8.2 million as of September 30, 2005; and
• Ongoing operation of our business on a viable basis following confirmation of the Plan.
We will continue to operate our business in the ordinary course as debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code.
Bankruptcy law does not permit solicitation of acceptances of the Plan until the Bankruptcy Court approves the applicable Disclosure Statement relating to the Plan as providing adequate information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor’s books and records, that would enable a hypothetical reasonable investor typical of the holder of claims or interests of the relevant class to make an informed judgment about the Plan. Accordingly, this is not intended to be, nor should it be construed as, a solicitation for a vote on the Plan. We will emerge from the Chapter 11 Case if and when the Plan is confirmed by the Bankruptcy Court.
The filing of the Chapter 11 Case constituted events of default under our Loan Agreement with CapitalSource and our Convertible Note held by Annex. As a result of the events of default, all debt outstanding under such loan documents became automatically and immediately due and payable. As of September 30, 2005, the amount of outstanding debt and accrued interest under the Loan Agreement was approximately $8.2 million, which was paid on November 22, 2005 utilizing proceeds from our debtor-in-possession credit facilities discussed below. The amount of outstanding debt under the Convertible Note was approximately $28.0 million as of September 30, 2005. We believe that any effort of Annex to enforce their rights under the Convertible Note will be stayed as a result of the filing of the Chapter 11 Case. In any event, we understand that Annex does not currently contemplate any such action and that Annex supports the Plan.
3. DEBTOR-IN-POSESSION CREDIT FACILITY
In connection with the Chapter 11 Case, on October 17, 2005, and as approved by the Bankruptcy Court on October 18, 2005, we entered into an interim financing arrangement with CapitalSource. In addition, senior and second lien credit facilities with Wells Fargo Bank, National Association, acting through its Wells Fargo Business Credit operating division (“WFBC”), and GB Retail Funding, LLC (“GB”), respectively, were approved by the Bankruptcy Court on November 16, 2005.
We require credit facilities for use during the Chapter 11 Case (“DIP Financing”) and to meet our working capital needs and fund our obligations under the Plan upon and following the effective date of the Plan (“Exit Financing”).
F-13
The WFBC credit facilities provide for a secured revolving line of credit (the “WFBC Revolving Credit Facility”) in an amount not to exceed $7.5 million and a secured equipment term loan (the “WFBC Term Credit Facility”) of $2.2 million. As of December 14, 2005, the amounts outstanding under the WFBC Revolving Credit Facility and the WFBC Term Credit Facility were $0.4 million and $2.2 million, respectively. Upon the effective date of the Plan that is satisfactory to WFBC, the WFBC credit facilities will convert to Exit Financing facilities by automatically extending the maturity date of the WFBC credit facilities to the date thirty-six months after the date of closing of the WFBC credit facilities (November 22, 2008). The WFBC credit facilities were used to refinance our CapitalSource debt and will provide for ongoing working capital needs and for payment of obligations under, and in accordance with, the Plan. All loans, advances and obligations under the WFBC credit facilities are secured by first priority security interests on all of our assets and reorganized Gardenburger, except general intangible assets (i.e., intellectual property, trademarks, brand names and domain names) and proceeds thereof.
The amount available under the WFBC Revolving Credit Facility is the lesser of (i) $7.5 million or (ii) up to the sum of: (i) 85% of eligible accounts receivable and (ii) the lesser of (a) $4.5 million or (b) the lesser of (x) 44.9% of eligible raw materials inventory plus 63.4% of eligible finished goods inventory or (y) 85% of the appraised net orderly liquidation value of eligible raw material inventory and eligible finished goods inventory, less (iii) reserves maintained by WFBC. The interest rate on the WFBC Revolving Credit Facility is the Prime Rate plus 0.50% per annum floating, payable monthly in arrears calculated on the basis of actual days elapsed in each year of 360 days. We or reorganized Gardenburger may also elect to fix the rate of interest on portions of revolving advances at an interest rate equal to 3.25% over Wells Fargo LIBOR. The default rate of interest will be 3.00% higher than the rate otherwise payable. A fee of 0.50% per annum on the unused portion of the WFBC Revolving Credit Facility will be payable monthly in arrears. As of December 14, 2005, we had $0.4 million outstanding on the WFBC Revolving Credit Facility at an interest rate of 7.75% and $3.1 million available for future use. We utilized $0.7 million of the proceeds from this facility to pay off the entire balance owed to CapitalSource pursuant to their Loan Agreement and, accordingly, as of the date of the filing of this Form 10-K, we do not owe any amounts to CapitalSource.
The initial amount available under the WFBC Term Credit Facility was $2.2 million. The interest rate on the WFBC Term Facility is the Prime Rate plus 1.00% per annum floating, payable monthly in arrears, calculated on the basis of actual days lapsed in a year of 360 days. We or reorganized Gardenburger may also elect to fix the rate of interest on portions of term advances at an interest rate equal to 3.75% over Wells Fargo LIBOR. The default rate of interest will be 3.00% higher than the rate otherwise payable. As of December 14, 2005, we had $2.2 million outstanding on the WFBC Term Credit Facility at an interest rate of 8.25%.
Pursuant to the Credit and Security Agreement, dated November 22, 2005, governing the WFBC credit facilities (the “WFBC Credit Agreement”), we are required to comply with certain financial covenants, which are described below:
(a) We are required to maintain a minimum Availability (as defined in the WFBC Credit Agreement) as follows:
Dates |
| Minimum Availability |
| |
11/22/05 through 12/02/05 |
| $ | 2,000,000 |
|
12/03/05 through 12/30/05 |
| $ | 1,750,000 |
|
12/31/05 and at all times thereafter |
| $ | 1,500,000 |
|
F-14
(b) We are required to achieve Net Cash Flow (as defined in the WFBC Credit Agreement) in an amount not less than the amount set forth below for the periods set forth below:
Test Period |
| Minimum Net Cash Flow |
| |
10/01/05 through 12/02/05 |
| $ | (900,000 | ) |
10/29/05 through 12/30/05 |
| $ | (600,000 | ) |
12/03/05 through 01/27/05 |
| $ | (1,800,000 | ) |
12/31/05 through 02/24/06 |
| $ | 200,000 |
|
(c) We are required to achieve, for each period described below, gross sales of not less than the amount set forth for each such period:
Period |
| Minimum Gross Sales |
| |
10/01/05 through 10/31/05 |
| $ | 3,600,000 |
|
11/01/05 through 11/30/05 |
| $ | 3,000,000 |
|
12/01/05 through 12/31/05 |
| $ | 3,600,000 |
|
01/01/06 through 01/31/06 |
| $ | 4,300,000 |
|
02/01/06 through 02/28/06 |
| $ | 3,900,000 |
|
03/01/06 through 03/31/06 |
| $ | 5,100,000 |
|
04/01/06 through 04/30/06 |
| $ | 4,500,000 |
|
05/01/06 through 05/31/06 |
| $ | 5,200,000 |
|
06/01/06 through 06/30/06 |
| $ | 5,200,000 |
|
07/01/06 through 07/31/06 |
| $ | 4,700,000 |
|
(d) In the event we fail to achieve the minimum gross sales as set forth in item (c) above for any period set forth above, we are required to achieve, for the period set forth below ending on the same end date as the period for which we failed such minimum gross sales covenant, cumulative Net Sales (as defined in the WFBC Credit Agreement) of not less than the amount set forth below for the period ending on the date set forth below:
Period |
| Minimum Net Sales |
| |
10/01/05 through 10/31/05 |
| $ | 3,100,000 |
|
10/01/05 through 11/30/05 |
| $ | 5,700,000 |
|
10/01/05 through 12/31/05 |
| $ | 8,600,000 |
|
10/01/05 through 01/31/06 |
| $ | 12,100,000 |
|
10/01/05 through 02/28/06 |
| $ | 15,500,000 |
|
10/01/05 through 03/31/06 |
| $ | 19,700,000 |
|
10/01/05 through 04/30/06 |
| $ | 23,700,000 |
|
10/01/05 through 05/31/06 |
| $ | 27,800,000 |
|
10/01/05 through 06/30/06 |
| $ | 32,000,000 |
|
10/01/05 through 07/31/06 |
| $ | 36,000,000 |
|
Pursuant to the WFBC Credit Agreement, on or before February 24, 2006, Wells Fargo shall set new covenant levels for item (b) above. The new covenant levels will be based upon our projections and cash budget for such periods received by Wells Fargo pursuant to the Credit and Security Agreement and will be no less stringent than the present levels, except that with respect to item (b) above, the new covenant levels will be based on a $500,000 negative variance based upon the projections and updated cash flow budget for such periods. A copy of the Wells Credit Agreement is attached to this Annual Report on Form 10-K as Exhibit 10.74.
The GB Loan Facility consists of a $5.0 million secured single-advance term loan. This facility is secured by a second priority lien in all collateral securing the WFBC credit facilities, except that it is secured by a first priority perfected security interest in all of our general intangible assets (i.e., intellectual property, trademarks, brand names and domain names) and proceeds thereof. The interest rate on the GB Loan Facility is the Prime Rate plus 6.75% per annum floating, payable monthly in arrears. As of December 14, 2005, we had $4.9 million outstanding on the GB Loan Facility at an interest rate of 14.0%. Upon the effective date of the Plan that is satisfactory to GB, the GB Loan Facility will convert to an Exit Financing facility by automatically extending the maturity date of the GB Loan Facility to the date thirty-six months after the date of closing of the GB Loan Facility (November 22, 2008).
F-15
Pursuant to the Credit and Security Agreement, dated November 22, 2005, governing the GB Loan Facility (the “GB Credit Agreement”), we are required to comply with certain financial covenants that are identical to the financial covenants described above in connection with the WFBC credit facilities. A copy of the GB Credit Agreement is attached to this Annual Report on Form 10-K as Exhibit 10.75.
As of December 2, 2005, we were in compliance with all of the financial covenants described above.
4. CHANGES IN ACCOUNTING PRINCIPLES
Accounting for Slotting Fees
Slotting fees refer to oral arrangements pursuant to which the retail grocer allows our products to be placed on the store’s shelves in exchange for a slotting fee. As reported in previous filings, slotting fees were initially recorded as a prepaid asset and the related expense was recognized ratably over a 12-month period beginning two months following product shipment as an offset to sales. Typically, 12 months is the estimated minimum period during which a retailer agrees to allocate shelf space. However, given that there are no written contractual commitments requiring the retail grocers to allocate shelf space for twelve months, in fiscal 2004, we determined that it was a preferable accounting method to expense the slotting fees at the time revenue is recognized. In accordance with Accounting Principles Board Opinion (“APB”) 20, “Accounting Changes,” the cumulative effect of the change in accounting for slotting fees was reflected in the first quarter of fiscal 2004. The unaudited quarterly results for the first, second and third quarters of fiscal 2004 were restated for this change in accounting policy as indicated below (in thousands, except per share data):
|
| 2004 |
| 2004 |
| 2004 |
| 2004 |
| ||||
Income (loss) before cumulative effect of a change in accounting principle and preferred dividends, as reported |
| $ | (1,730 | ) | $ | (1,225 | ) | $ | 108 |
| $ | (3,398 | ) |
Adjustment to record actual slotting fees incurred |
| 9 |
| 330 |
| (131 | ) | n/a |
| ||||
Loss before cumulative effect of a change in accounting principle and preferred dividends, as adjusted |
| (1,721 | ) | (895 | ) | (23 | ) | (3,398 | ) | ||||
Cumulative effect of a change in accounting for slotting fees |
| (1,150 | ) | — |
| — |
| — |
| ||||
Preferred dividends |
| 1,294 |
| 1,294 |
| 1,149 |
| 1,102 |
| ||||
Net loss applicable to common shareholders |
| $ | (4,165 | ) | $ | (2,189 | ) | $ | (1,172 | ) | $ | (4,500 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Basic and diluted net loss per share applicable to common shareholders, as reported |
| $ | (0.34 | ) | $ | (0.28 | ) | $ | (0.12 | ) | $ | (0.50 | ) |
Adjustment for reversal of period slotting fee additions and amortization and cumulative effect of a change in accounting principle |
| $ | (0.13 | ) | $ | 0.04 |
| $ | (0.01 | ) | $ | n/a |
|
Basic and diluted net loss per share applicable to common shareholders, as adjusted (1) |
| $ | (0.46 | ) | $ | (0.24 | ) | $ | (0.13 | ) | $ | (0.50 | ) |
(1) Per share amounts may not add due to rounding.
F-16
Pro forma results for fiscal 2003, assuming the change in accounting for slotting fees occurred on October 1, 2002, the first day of fiscal 2003, are as follows (in thousands, except per share data):
|
| Fiscal 2003 |
| |
Income (loss) before cumulative effect of a change in accounting principle and preferred dividends, as reported |
| $ | (5,202 | ) |
Adjustment to record actual slotting fees incurred |
| (216 | ) | |
Income (loss) before cumulative effect of a change in accounting principle and preferred dividends, pro forma |
| $ | (5,418 | ) |
|
|
|
| |
Net loss applicable to common shareholders, as reported |
| $ | (10,790 | ) |
Adjustment to record actual slotting fees incurred |
| (216 | ) | |
Net loss applicable to common shareholders, pro forma |
| $ | (11,006 | ) |
|
|
|
| |
Basic and diluted loss per share before cumulative effect of a change in accounting principle, as reported |
| $ | (1.15 | ) |
Adjustment to record actual slotting fees incurred |
| (0.02 | ) | |
Basic and diluted loss per share before cumulative effect of a change in accounting principle, pro forma(1) |
| $ | (1.18 | ) |
|
|
|
| |
Basic and diluted net loss per share applicable to common shareholders, as reported |
| $ | (1.20 | ) |
Adjustment to record actual slotting fees incurred |
| (0.02 | ) | |
Basic and diluted net loss per share applicable to common shareholders, pro forma |
| $ | (1.22 | ) |
(1) Per share amounts may not add due to rounding.
Accounting for Goodwill
In July 2001, the FASB issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, ceased upon adoption of this Statement in the first quarter of fiscal 2003.
Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” we evaluated our goodwill balance for impairment upon the adoption of SFAS No. 142 in the first quarter of fiscal 2003 utilizing the discounted cash flows method and determined that the entire goodwill balance of $411,000 was permanently impaired. Accordingly, we wrote off our entire goodwill balance of $411,000 in the first quarter of fiscal 2003.
5. NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 154
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections: a replacement of APB Opinion No. 20 and FASB Statement No. 3,” which requires companies to apply most voluntary accounting changes retrospectively to prior financial statements. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Any future voluntary accounting changes made by us will be accounted for under SFAS No. 154.
SFAS No. 151
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs: an amendment of ARB No. 43, Chapter 4,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not believe the provisions of SFAS No. 151, when applied, will have a material impact on our financial position or results of operations.
F-17
SFAS No. 123R
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment: an amendment of FASB Statements No. 123 and 95,” which requires companies to recognize in their income statement the grant-date fair value of stock options and other equity-based compensation issued to employees. SFAS No. 123R is effective for annual periods beginning after June 15, 2005. Accordingly, we adopted SFAS No. 123R on October 1, 2005. Unamortized stock-based compensation expense, on a pro forma basis, as of September 30, 2005 totaled $190,000, with $144,000 to be amortized in fiscal 2006 and $46,000 to be amortized in fiscal 2007.
6. INVENTORIES
Detail of inventories at September 30, 2005 and 2004 was as follows (in thousands):
|
| 2005 |
| 2004 |
| ||
Raw materials |
| $ | 521 |
| $ | 967 |
|
Packaging and supplies |
| 294 |
| 426 |
| ||
Finished goods |
| 5,546 |
| 7,571 |
| ||
|
| $ | 6,361 |
| $ | 8,964 |
|
7. MACHINERY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Detail of machinery and equipment and leasehold improvements at September 30, 2005 and 2004 was as follows (in thousands):
|
| 2005 |
| 2004 |
| ||
Machinery and equipment |
| $ | 18,741 |
| $ | 18,415 |
|
Office furniture and equipment |
| 3,215 |
| 3,869 |
| ||
Leasehold improvements |
| 1,485 |
| 1,550 |
| ||
|
| 23,441 |
| 23,834 |
| ||
Construction in progress |
| 41 |
| 119 |
| ||
|
| 23,482 |
| 23,953 |
| ||
Less accumulated depreciation |
| (15,065 | ) | (13,303 | ) | ||
|
| $ | 8,417 |
| $ | 10,650 |
|
8. OTHER ASSETS
As of September 30, 2005, other assets include trademarks. As of September 30, 2004, other assets also included deferred financing fees. See Note 2 for a discussion of the write-off of the deferred financing fees during fiscal 2005. The gross amount of deferred financing fees and trademarks and the related accumulated amortization were as follows (in thousands):
|
| September 30, |
| ||||
|
| 2005 |
| 2004 |
| ||
Deferred financing fees |
| $ | — |
| $ | 2,006 |
|
Accumulated amortization |
| — |
| (1,647 | ) | ||
|
|
|
| 359 |
| ||
|
|
|
|
|
| ||
Trademarks |
| 415 |
| 415 |
| ||
Accumulated amortization |
| (89 | ) | (78 | ) | ||
|
| 326 |
| 337 |
| ||
|
| $ | 326 |
| $ | 696 |
|
Amortization expense was as follows during fiscal 2005, 2004 and 2003 (in thousands):
|
| Year Ended September 30, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
Deferred financing fees |
| $ | 385 |
| $ | 318 |
| $ | 305 |
|
Trademarks |
| 11 |
| 10 |
| 10 |
| |||
F-18
Amortization of trademarks is as follows over the next five fiscal years (in thousands):
2006 |
| $ | 10 |
|
2007 |
| 10 |
| |
2008 |
| 10 |
| |
2009 |
| 10 |
| |
2010 |
| 10 |
|
9. OTHER CURRENT LIABILITIES
Other current liabilities included the following (in thousands):
|
| September 30, |
| ||||
|
| 2005 |
| 2004 |
| ||
Accrued interest |
| $ | 77 |
| $ | 3,288 |
|
There were no other current liabilities that represented 5% or more of the total current liabilities balance at September 30, 2005 or 2004.
10. COMMITMENTS AND CONTINGENCIES
Operating Leases
We lease our operating facilities and corporate offices. Additionally, we lease certain equipment. Future minimum lease payments under operating leases at September 30, 2005 were as follows (in thousands):
Year Ending September 30, |
|
|
| |
2006 |
| $ | 692 |
|
2007 |
| 577 |
| |
2008 |
| 153 |
| |
2009 |
| 9 |
| |
2010 |
| — |
| |
Thereafter |
| — |
| |
Total |
| $ | 1,431 |
|
Rental expense for the years ended September 30, 2005, 2004 and 2003 was $641,000, $661,000 and $773,000, respectively.
Contractual Obligations
Contractual payments under our short-term note payable, our term loan, our Convertible Note, our operating leases and other obligations are significant. A schedule of contractual payments remaining due at September 30, 2005 in the next five fiscal years, including exit fees of approximately $4.7 million for the Convertible Note, is as follows (in thousands):
|
| Total |
| Fiscal |
| Fiscal |
| Thereafter |
| ||||
Short-Term Note Payable |
| $ | 5,244 |
| $ | 5,244 |
| $ | — |
| $ | — |
|
Term Loan |
| 2,861 |
| 2,861 |
| — |
| — |
| ||||
Convertible Note |
| 27,988 |
| 27,988 |
| — |
| — |
| ||||
Operating Leases |
| 1,431 |
| 1,269 |
| 162 |
| — |
| ||||
Purchase Order Obligations |
| 1,060 |
| 1,060 |
| — |
| — |
| ||||
License Agreement |
| 271 |
| 150 |
| 121 |
| — |
| ||||
Retention Agreements |
| 899 |
| 899 |
| — |
| — |
| ||||
Total |
| $ | 39,754 |
| $ | 39,471 |
| $ | 283 |
| $ | — |
|
As discussed in Note 2 above, our short-term note payable and our term loan were paid off on November 22, 2005 in accordance with the Plan. In addition, pursuant to the Plan, the Convertible Note will be terminated in exchange for new equity interests in Gardenburger.
F-19
In addition, we have retention, employment, severance and change-in-control agreements with our executive officers and certain other employees, which provide for benefits upon, among other things, a sale of Gardenburger. The Bankruptcy Court declaring our Plan effective would be considered a change-in-control. See also Note 18.
In the normal course of business, we offer customers trade spending incentives.
11. REVOLVING CREDIT AND TERM LOAN
As of September 30, 2005, we had a Revolving Credit and Term Loan Agreement (as amended, the “Loan Agreement”) with CapitalSource Finance LLC (“CapitalSource”). The Loan Agreement provided for an $8.0 million term loan and a $7.0 million short-term note payable (together, “the Loans”).
In order to address issues relating to our ability to meet our financial obligations and to address non-compliance with certain of our financial covenants, we entered into amendments to this Loan Agreement on February 18, 2005. Pursuant to the amendment to our Loan Agreement, CapitalSource agreed to waive our non-compliance with certain financial covenants as of September 30, 2004 and December 31, 2004 and to provide additional availability of up to $500,000 under the revolving credit facility from February 18, 2005 to May 31, 2005. In addition, future financial covenants were amended.
At September 30, 2005, we had $2.9 million outstanding at an interest rate of 11.25% on the term loan and $5.2 million outstanding at an interest rate of 8.25% on the short-term note payable. Pursuant to the Plan, all amounts outstanding under the Loans were paid off and Loan Agreement terminated on November 22, 2005 utilizing our DIP Financing. The $650,000 required exit fee was paid in August 2005.
We also paid CapitalSource an unused line of credit fee equal to 0.083% per month of unused amounts under the short-term note payable, which totaled $24,576 in fiscal 2005, $32,116 in fiscal 2004 and $42,964 in fiscal 2003.
12. CONVERTIBLE SENIOR SUBORDINATED NOTES AND WARRANTS
In September 2004, Dresdner Kleinwort Benson Private Equity Partners LP (“Dresdner”), the original holder of our Convertible Note, transferred all rights, including interest accrued from September 30, 2001, pursuant to the Convertible Note, to Annex. There were no changes to the terms of the Convertible Note upon this transfer.
In order to address issues relating to our ability to meet our financial obligations and to address non-compliance with certain of our financial covenants, we entered into amendments to our Note Purchase Agreement with Annex on February 18, 2005. Pursuant to the amendment to our Note Purchase Agreement, Annex agreed to waive our non-compliance with certain financial covenants, amended future financial covenants and consented to the amendment to the Loan Agreement discussed above.
The interest rate on the Convertible Note was 15% per annum as of September 30, 2005.
At September 30, 2005, the Convertible Note balance consisted of the following (in thousands):
Principal |
| $ | 17,156 |
|
Accrued interest |
| 6,167 |
| |
Accrued exit fees |
| 4,665 |
| |
|
| $ | 27,988 |
|
According to our Plan, the Convertible Note balance will be extinguished and Annex will be issued new equity interests in Gardenburger in full satisfaction of this claim. Accordingly, we ceased the accrual of all interest and exit fees related to our Convertible Note effective October 14, 2005.
F-20
In addition, under the terms of the Warrant Agreement, which was issued in January 2002 in connection with certain term revisions to the Convertible Note, we issued an immediately exercisable warrant with a ten-year term to purchase 557,981 shares of our common stock at a price of $0.28 per share, subject to anti-dilution adjustments. Annex has registration rights with respect to shares issuable upon exercise of this warrant. However, pursuant to the Plan, these warrants will be canceled in connection with the exchange of all of Annex’s outstanding claims into new equity interests of Gardenburger.
The Convertible Note is convertible into common stock at the election of the holder; the conversion price at September 30, 2005 was $9.78 per share.
13. CONVERTIBLE REDEEMABLE PREFERRED STOCK
At September 30, 2005, we had outstanding 552,500 shares of Series C Convertible Redeemable Preferred Stock (“Series C Stock”) with a face value of $27.6 million and 97,500 shares of Series D Convertible Redeemable Preferred Stock (“Series D Stock”) with a face value of $4.9 million, which are convertible into 2,762,500 and 1,300,000 shares (subject to antidilution adjustments) of our common stock, respectively, at any time at the discretion of the holder.
The terms of the Series C Stock and Series D Stock provide for a 12% cumulative dividend and a 10% premium on any liquidation or redemption. The premium was being accreted over the redemption period. At September 30, 2005, we had accrued $3.0 million in relation to the redemption premium, which is included in the preferred stock balance in the balance sheet. The liquidation preference of the Series C and Series D Stock was $62.0 million at September 30, 2005.
As approved by our shareholders at our 2004 Annual Shareholder Meeting in March 2004, the terms of our Series C Stock and Series D Stock were amended to defer the earliest date on which holders may require redemption, upon satisfaction of certain conditions outside of the control of the holders, of their shares of Series C Stock and Series D Stock to as late as June 30, 2008 instead of March 31, 2006. Accordingly, the amount of the 10% redemption premium not previously accreted was being accreted over a longer period of time, which reduced our quarterly preferred dividend charge from $1.3 million to approximately $1.2 million beginning in the third quarter of fiscal 2004. Detail of our preferred dividends was as follows (in thousands):
|
| Year Ended September 30, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
12% cumulative dividends |
| $ | 3,900 |
| $ | 3,900 |
| $ | 3,900 |
|
Accretion of 10% redemption premium |
| 481 |
| 769 |
| 1,022 |
| |||
Accretion of original issue discount |
| 120 |
| 170 |
| 255 |
| |||
|
| $ | 4,501 |
| $ | 4,839 |
| $ | 5,177 |
|
The Convertible Redeemable Preferred Stock balance consisted of the following (in thousands):
|
| September 30, |
| ||||
|
| 2005 |
| 2004 |
| ||
Original face amount |
| $ | 32,500 |
| $ | 32,500 |
|
Accrued dividends |
| 25,188 |
| 21,288 |
| ||
10% redemption premium |
| 3,012 |
| 2,531 |
| ||
Original issue discount |
| (348 | ) | (468 | ) | ||
|
| $ | 60,352 |
| $ | 55,851 |
|
Farallon Partners, L.L.C., and its affiliates, which together own approximately 30.8% of our Series C and Series D Stock, have a substantial equity interest in CapitalSource Holdings LLC, which controls CapitalSource. An affiliate of Rosewood Capital III, L.P., which also owns approximately 30.8% of the Series C and Series D Stock, has a small (less than 2%) equity interest in CapitalSource Holdings LLC. Two of our former directors are employed by an affiliate of Rosewood Capital III, L.P. These directors resigned from our Board of Directors effective October 4, 2004.
F-21
As discussed in Note 2, pursuant to our Plan, all shares of preferred stock will be canceled with no compensation to the holders thereof. Accordingly, we eliminated the accrual of dividends and the accretion of the redemption premium and the original issue discount as of October 14, 2005, the date we filed our Chapter 11 Case.
14. INCOME TAXES
We account for income taxes under SFAS No. 109, “Accounting for Income Taxes.” We realize tax benefits as a result of the exercise of non-qualified stock options and the exercise and subsequent sale of certain incentive stock options (disqualifying dispositions). For financial reporting purposes, any reduction in income tax obligations as a result of these tax benefits is credited to additional paid-in capital. There were no tax benefits realized related to stock options in fiscal 2005, 2004 or 2003.
Total deferred income tax assets were $31.8 million and $25.3 million at September 30, 2005 and 2004, respectively, and deferred income tax liabilities were $1.0 million and $1.2 million, respectively, prior to the consideration of any valuation allowance. Individually significant deferred tax assets and liabilities were as follows (in thousands):
|
| September 30, |
| ||||
|
| 2005 |
| 2004 |
| ||
Net operating loss carryforwards |
| $ | 27,650 |
| $ | 23,376 |
|
Accrued interest |
| 2,398 |
| — |
| ||
Accrued profit sharing and retention |
| 322 |
| — |
| ||
Provision for trade promotions and discounts |
| 309 |
| 825 |
| ||
Book/tax depreciation and amortization difference |
| (1,032 | ) | (1,187 | ) | ||
Other |
| 1,107 |
| 1,101 |
| ||
|
| 30,754 |
| 24,115 |
| ||
Valuation allowance |
| (30,754 | ) | (24,115 | ) | ||
Net deferred tax balance |
| $ | — |
| $ | — |
|
In accordance with SFAS No. 109, we have recorded a valuation allowance against the entire amount of net deferred tax assets as of September 30, 2005 and 2004 as a result of recurring operating losses in recent years.
We have tax net operating loss carryforwards, totaling $72.0 million, which expire as follows: 2012: $1.4 million; 2018: $10.4 million; 2019: $31.6 million; 2020: $3.0 million; 2021: $4.4 million; 2022: $0.6 million; 2023: $6.8 million; 2024: $5.2 million; and 2025: $8.6 million. However, in conjunction with the redemption of our Series A and Series B Convertible Redeemable Preferred Stock and the issuance of our Series C and Series D Convertible Redeemable Preferred Stock in January 2002, we experienced an ownership change as defined in the Internal Revenue Code and, accordingly, the use of our pre-January 2002 net operating losses are subject to an annual limitation of approximately $2.4 million. Our net operating losses may be limited further in the future due to additional changes in the ownership of Gardenburger.
The reconciliation between the effective tax rate and the statutory federal income tax rate was as follows:
|
| Year Ended September 30, |
| ||||
|
| 2005 |
| 2004 |
| 2003 |
|
Statutory federal income tax rate |
| (34.0 | )% | (34.0 | )% | (34.0 | )% |
State taxes, net of federal income tax benefit |
| (4.4 | ) | (4.4 | ) | (4.4 | ) |
Preferred dividends |
| 12.4 |
| 15.5 |
| 18.4 |
|
Slotting fees |
| — |
| 2.9 |
| — |
|
Effect of change in valuation allowance |
| 26.0 |
| 19.9 |
| 20.2 |
|
Other |
| — |
| 0.1 |
| (0.2 | ) |
Effective tax rate |
| 0.0 | % | 0.0 | % | 0.0 | % |
F-22
15. SHAREHOLDERS’ EQUITY
Preferred Stock
We have authorized 5,000,000 shares of preferred stock, of which 650,000 shares have been issued (see Note 13). Such stock may be issued by the Board of Directors in one or more series, with the preferences, limitations and rights of each series to be determined by the Board of Directors.
Preferred Share Purchase Rights
In April 1996, we declared a dividend distribution of one preferred share purchase right on each outstanding share of our common stock. Each right, when exercisable, will entitle shareholders to buy one one-hundredth of a share of Series A Junior Participating Preferred Stock at an exercise price of $47 per share. The rights will become exercisable if a person or group (an “Acquiring Person”) acquires 15% or more of our common stock (with certain exceptions) or announces a tender offer for 15% or more of the common stock. With the exception of certain cash tender offers, if a person becomes an Acquiring Person, or in the event of certain mergers with an Acquiring Person, the rights will become exercisable for shares of common stock with a market value of two times the exercise price of the right. Our Board of Directors is entitled to redeem the rights at $.01 per right at any time before an Acquiring Person has acquired 15% or more of the outstanding common stock.
Restrictions on Dividends
No cash dividends may be paid on our common stock unless dividends have been paid on all outstanding shares of our Series C Stock and Series D Stock in an amount equal to 12% cumulative dividends accrued on such preferred shares through the record date for the common stock dividend (or, if greater, the amount of the common stock dividend payable on the preferred shares on an as-converted basis). In addition, we are prohibited from paying cash dividends or redeeming any of our capital stock under the terms of the Loan Agreement and the Convertible Note.
Stock Plan Options
In February 2001, our shareholders approved the 2001 Stock Incentive Plan (the “2001 Plan”) to replace our 1992 First Amended and Restated Combination Stock Option Plan (the “1992 Plan”), which was scheduled to expire in January 2002. Upon approval of the 2001 Plan, we no longer granted awards under the 1992 Plan. The 2001 Plan provides for stock-based awards to employees, officers, directors and consultants. Awards that may be granted under the 2001 Plan include stock options, in the form of incentive stock options (“ISOs”) and non-statutory stock options (“NSOs”), stock appreciation rights, restricted awards, performance awards and other stock-based awards.
The exercise price per share generally must be at least 100% of the fair market value of a share of common stock on the date the option is granted for ISOs, 75% for NSOs and 25% for deferred compensation options. The Executive Personnel and Compensation Committee of our Board of Directors determines the vesting and other terms of the awards under the 2001 Plan. Vesting for certain options may accelerate upon a change in control. Options granted under the 2001 Plan and the 1992 Plan generally vest over a three to five year period.
The 2001 Plan permits the issuance of up to 1,400,000 shares of our common stock plus 1,951,023 shares available under the 1992 Plan. In addition, if awards granted under the 1992 Plan are forfeited or expire, shares of common stock reserved for such forfeited or expired awards become available for issuance under the 2001 Plan. As of September 30, 2005, we had 3,351,023 shares of common stock reserved for issuance under the 2001 Plan and the 1992 Plan combined.
F-23
Activity under the 1992 Plan and the 2001 Plan is summarized as follows (in thousands, except per share amounts):
|
| Shares Available |
| Shares Subject to |
| Weighted Average |
| |
Balances, September 30, 2002 |
| 109 |
| 3,242 |
| $ | 3.05 |
|
Options canceled |
| 606 |
| (606 | ) | 1.87 |
| |
Balances, September 30, 2003 |
| 715 |
| 2,636 |
| 3.32 |
| |
Options canceled |
| 902 |
| (902 | ) | 3.10 |
| |
Balances, September 30, 2004 |
| 1,617 |
| 1,734 |
| 3.50 |
| |
Options canceled |
| 592 |
| (592 | ) | 5.76 |
| |
Balances, September 30, 2005 |
| 2,209 |
| 1,142 |
| $ | 2.34 |
|
Non-Plan Options
On March 10, 1992, we granted a non-statutory stock option to our then Chief Executive Officer exercisable for 1,650,000 shares of our common stock. Such option was exercisable for a period of ten years from the date of grant at an exercise price of $1.00 per share, the fair market value of our common stock on the date of grant. On May 8, 2001, we extended the exercise period of the non-statutory stock option for an additional two years and on December 3, 2003, for an additional three years and this option now expires January 31, 2007. We did not recognize any compensation expense upon making any of the changes to the expiration date of this stock option since the individual was still an employee and director and the exercise price of the stock option was greater than the fair market value of our common stock on the dates that the changes were made.
Portions of the option have been exercised as follows:
Fiscal Year |
| Shares Received |
|
1996 |
| 625,000 |
|
2000 |
| 45,000 |
|
2001 |
| 30,000 |
|
At September 30, 2005, an option to purchase 950,000 shares of common stock remained outstanding and exercisable in full and 950,000 shares of our common stock were reserved for issuance under this option grant.
On April 14, 1996, we granted an option to our then Chief Executive Officer exercisable for 300,000 shares of our common stock. Pursuant to the terms of the original grant, such option was exercisable for a period of five years from the Chief Executive Officer’s termination date of August 4, 2000 at an exercise price of $8.69 per share. As of September 30, 2005, the option had expired unexercised.
During 1999, we granted options to certain employees and two consultants covering a total of 80,000 shares of our common stock at an average exercise price of $11.16 per share.
Activity related to these options was as follows:
Fiscal Year |
| Shares |
| Average |
| |
2000 |
| 15,332 |
| $ | 11.63 |
|
2001 |
| 22,001 |
| 11.35 |
| |
2002 |
| 6,667 |
| 11.63 |
| |
2003 |
| — |
| — |
| |
2004 |
| 3,000 |
| 11.63 |
| |
2005 |
| — |
| — |
| |
At September 30, 2005, options covering 33,000 shares of common stock remained outstanding at an average exercise price of $10.68 and 33,000 shares of our common stock were reserved for issuance for these options. The fair value of options granted to non-employees was not material.
F-24
On March 1, 2000, we granted options to the members of our Board of Directors covering a total of 14,500 shares of our common stock. Such options are exercisable for a period of ten years from the date of grant at an exercise price of $5.69 per share. During fiscal 2005, 2004 and 2001, options covering 1,500, 1,500 and 7,000 shares of common stock were canceled, respectively, and at September 30, 2005, options covering 4,500 shares of common stock were outstanding and reserved for issuance pursuant to these option grants.
The following table summarizes information about all stock options outstanding at September 30, 2005:
Options Outstanding |
| Options Exercisable |
| ||||||||||
Range of Exercise |
| Number |
| Weighted |
| Weighted |
| Number of |
| Weighted |
| ||
$0.4150 - $1.3563 |
| 1,720,500 |
| 3.2 |
| $ | 0.8104 |
| 1,591,800 |
| $ | 0.8307 |
|
1.3564 - 2.7125 |
| 122,500 |
| 4.7 |
| 1.7185 |
| 122,500 |
| 1.7185 |
| ||
5.4251 - 6.7813 |
| 145,500 |
| 2.9 |
| 6.4885 |
| 145,500 |
| 6.4885 |
| ||
6.7814 - 8.1375 |
| 24,000 |
| 2.9 |
| 7.7825 |
| 24,000 |
| 7.7825 |
| ||
8.1376 - 9.4938 |
| 25,500 |
| 2.4 |
| 8.9565 |
| 25,500 |
| 8.9565 |
| ||
9.4939 - 10.8500 |
| 37,420 |
| 3.5 |
| 10.0625 |
| 37,420 |
| 10.0625 |
| ||
10.8501 - 12.2063 |
| 28,000 |
| 3.4 |
| 11.6027 |
| 28,000 |
| 11.6027 |
| ||
12.2064 - 13.1250 |
| 26,000 |
| 0.6 |
| 12.6923 |
| 26,000 |
| 12.6923 |
| ||
$0.4150 - $13.1250 |
| 2,129,420 |
| 3.2 |
| $ | 1.8763 |
| 2,000,720 |
| $ | 1.9611 |
|
At September 30, 2004 and 2003, options covering 2,640,620 and 2,910,919 shares of our common stock, respectively, were exercisable at weighted average exercise prices of $3.71 per share and $4.14 per share, respectively.
Warrants
In January 2002, in conjunction with amendments to our Convertible Note and Convertible Redeemable Preferred Stock, we issued warrants exercisable for a total of 1,115,962 shares of our common stock at an exercise price of $0.28 per share. The warrants were immediately exercisable and expire 10 years from the date of grant. As of September 30, 2005, none of these warrants had been exercised and we had 1,115,962 shares of our common stock reserved for future issuance related to these warrants. The value of the warrants, utilizing the Black-Scholes methodology, was $95,000 and was expensed during fiscal 2002.
16. 401(k) PLAN
We have a 401(k) Salary Deferral Plan, which covers all eligible employees who have reached the age of 18. The covered employees may elect to have an amount deducted from their wages for investment in a retirement plan. We match 100% of employee contributions up to 2% of compensation. Our contribution to this plan was approximately $64,000 in 2005, $107,000 in 2004 and $117,000 in 2003.
F-25
17. RELATED PARTY TRANSACTIONS
Farallon Partners, L.L.C., and its affiliates, which together own approximately 30.8% of our Series C Stock and Series D Stock, have a substantial equity interest in CapitalSource Holdings LLC, which controls CapitalSource (see Note 11). An affiliate of Rosewood Capital III, L.P., which also owns approximately 30.8% of our Series C Stock and Series D Stock, has a small (less than 2%) equity interest in CapitalSource Holdings LLC. Two of our former directors are employed by an affiliate of Rosewood Capital III, L.P. These directors resigned from our Board of Directors effective October 4, 2004.
Richard L. Mazer, a Director, is President and Chief Executive Officer of Ventura Foods, LLC. We purchased barbecue sauce from Ventura Foods totaling $273,000, $668,000 and $735,000 in fiscal 2005, 2004 and 2003, respectively. At September 30, 2005 and 2004, we owed Ventura Foods LLC $26,000 and $0, respectively, related to purchases of the barbecue sauce. We believe that the price paid to Ventura Foods is fair in comparison with prices that would be paid to an independent third party for similar barbecue sauce.
Mr. Coleman, a former Director who resigned from our Board of Directors effective March 14, 2005, is Managing Partner of Annex Capital Management LLC to which we are indebted in the principal amount of approximately $17.2 million plus $6.2 million of accrued but unpaid interest and $4.7 million of accrued but unpaid exit fees related to this debt. This debt currently bears interest at the annual rate of 15%.
We entered into a licensing agreement with Mr. Wenner, a Director, in fiscal 2004, which expires in May 2009. Pursuant to the agreement, Mr. Wenner grants to us an exclusive, royalty-free, worldwide license to make use of, copy, reproduce, modify, adapt, distribute, transmit, broadcast, display, exhibit, project and otherwise exploit certain of Mr. Wenner’s property. In exchange, we pay Mr. Wenner $75,000 per annum. The agreement also provides that, during the term of the agreement, Mr. Wenner shall make, at dates and times reasonably agreed to by each of Mr. Wenner and us, certain personal appearances for which Mr. Wenner shall be compensated at the rate of $500 per day, plus all reasonable and necessary expenses (including coach air travel, hotel accommodations and meal expenses) incurred by Mr. Wenner in connection with such personal appearances. Mr. Wenner received approximately $79,000 and $29,000 pursuant to this agreement in fiscal 2005 and fiscal 2004, respectively.
F-26
18. RETENTION AND SEPARATION AGREEMENTS
We entered into Retention Agreements with each of our three executive officers and with two key employees (the “Executives”) on January 27, 2005. The Executives are Scott C. Wallace, Chief Executive Officer, President and Chairman of the Board, James W. Linford, Senior Vice President and Chief Operating Officer, Robert T. Trebing, Jr., Chief Financial Officer, Robert Dixon, Vice President of Sales and Lori Luke, Vice President of Marketing. The Retention Agreements provided incentive for each of the Executives to continue to be employed by Gardenburger, Inc. through and following a change in control or going private transaction. The agreements provided for payment of a retention bonus on the earlier of (1) the date of a change of control, (2) the date of a going private transaction or (3) the second anniversary of the effective date of the agreement. If a change in control or going private transaction occurred during the first eighteen months following the effective date of the agreement, the Executive was to receive a lump sum payment equal to twelve months of base salary. If a change in control or going private transaction occurred after the eighteen month anniversary of the agreement or if the Executive remained continuously employed by Gardenburger, Inc. through the second anniversary of the effective date of the agreement, the Executive was to receive a lump sum payment equal to sixteen months of base salary. These retention bonuses were subject to certain conditions set forth in the agreements.
On March 24, 2005, we entered into amendments to these Retention Agreements in order to, among other things, revise the definition of “Change in Control” and delete Section 4.3 “Bankruptcy Limitation” in each of the agreements. On each of May 4, 2005 and July 19, 2005, we entered into, respectively, an Amended and Restated Retention Agreement and a Second Amended and Restated Retention Agreement (the “Agreement”) with each of the Executives. The Agreement provides incentive for each of the Executives to continue to be employed by us through and following a Change in Control (as defined in the Agreement) or a Sale Transaction (as defined in the Agreement). The Agreement provides for payment of 100% of the retention bonus immediately following the date of a Change in Control. The Agreement also provides for payment of 75% of a retention bonus on the date of our execution of a Sale Transaction, with the remaining 25% of the retention bonus payable following the date of the consummation of the transactions contemplated by the Sale Transaction. If the signing of a Sale Transaction or Change in Control does not occur by January 27, 2007, the full 100% of the retention bonus is payable to the Executive. The Agreement also provides for payment of a retention bonus if the Executive’s employment by us is terminated without Cause (as defined in the Agreement) other than in connection with the Executive’s death or Disability (as defined in the Agreement). These retention bonuses are subject to certain conditions set forth in the Agreement. Declaration by the Bankruptcy Court of the effectiveness of our Plan would be considered a Change in Control.
We entered into a Separation Agreement dated August 26, 2005 and a Consulting Agreement dated August 26, 2005 with Mr. Robert T. Trebing, Jr., our former Senior Vice President and Chief Financial Officer. Pursuant to his previously existing employment agreement, Mr. Trebing received $204,000, representing his annual base salary, upon the date of his termination and the signing of the Separation Agreement. Pursuant to his Consulting Agreement, Mr. Trebing received $25,500 upon signing of the agreement and receives $8,500 for his services every two week period thereafter. Pursuant to the Consulting Agreement, Mr. Trebing serves as the Chief Financial Officer of the Company, as well as the Principal Financial Officer. The Consulting Agreement remains in effect until the earlier of (i) the date of Gardenburger’s emergence from bankruptcy under the United States Bankruptcy Code or (ii) termination of the agreement by either party by giving the other party 30 days prior written notice.
On February 18, 2005, we modified our debt agreements. Refer to Notes 12 and 13 for further information.
F-27
GARDENBURGER, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 2005, 2004 AND 2003
(In thousands)
Column A |
| Column B |
| Column C |
| Column D |
| Column E |
| |||||||
|
| Balance |
| Charged |
| Charged to |
|
|
| Balance |
| |||||
|
| at Beginning |
| to Costs and |
| Other Accounts - |
| Deductions - |
| at End |
| |||||
Description |
| of Period |
| Expenses |
| Describe |
| Describe (a) |
| of Period |
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Year Ended September 30, 2003: |
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Reserves deducted from asset accounts: |
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Allowance for uncollectible accounts |
| $ | 200 |
| $ | — |
| $ | — |
| $ | 7 |
| $ | 193 |
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Year Ended September 30, 2004: |
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Reserves deducted from asset accounts: |
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Allowance for uncollectible accounts |
| $ | 193 |
| $ | — |
| $ | — |
| $ | 89 |
| $ | 104 |
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Year Ended September 30, 2005: |
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Reserves deducted from asset accounts: |
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Allowance for uncollectible accounts |
| $ | 104 |
| $ | — |
| $ | — |
| $ | 4 |
| $ | 100 |
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(a) Charges to the account included in this column are for the purposes for which the reserve was created.
F-28